Q4 2022 Orion Engineered Carbons SA Earnings Call
Question and answer session will follow the formal presentation.
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At this time I'll now turn the conference over to Wendy Wilson head of Investor Relations. When did you may begin.
Thank you.
Good morning, everyone and welcome to Orion engineered Carbons conference call to discuss our fourth quarter and full year 2022 financial result.
Wendy Wilson head of Investor Relations.
With me today are Corning painter, Chief Executive Officer, and Jeff <unk>, Chief Financial Officer.
We issued a 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 forward looking statements.
These statements are subject to the risks and uncertainties 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 February 17.
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.
Additionally, when we comment today on EBITDA, we will be referring to adjusted EBITDA.
I will now turn the call over to Corning painter.
Thank you Andy Good morning, everyone and welcome to our earnings Conference call. We had a great year in 2020 too many things go after the tremendous Orion team for advancing our sustainability road and financial agenda in the face of multiple challenges throughout the year challenges.
We treated as opportunities we delivered fourth quarter adjusted EBITDA of approximately $65 million, a 25% increase with specialty outperforming our expectations due to the strength of our premium products. Despite some customer destocking.
Moreover, the team delivered record full year, adjusted EBITDA of $312 million.
Our first time, breaking the $300 million.
Let me start out by highlighting four key accomplishments.
First as we mentioned on our third quarter call. We made substantial progress in the 2023 to 2020 for rubber negotiation cycle price volume and terms I say 2023 to 2024, because taking Asia where contracts are structured.
Differently out of the equation over 50% of our tire volume will be on multi year contracts.
Our progress reflects the customers value, our dependability and quality and that the global supply demand dynamics continue to work in our favor.
For example, in North America underlying demand is increasing due to onshoring of tire production.
Couple that with the need for sustainable returns on invested capital, including sustainability tab.
We see carbon black capacity remaining tight.
I'll show you more on this a bit later based on pricing alone. We expect rubber gross profit per ton to increase 80 to $100 in 'twenty two 'twenty three.
Second we achieved a number of sustainability related milestones, we kept our third round U S. Air emissions project on track, having recently announced its completion the project execution environment improved in 2022, but still our people contractors and suppliers worked around.
Many challenges we were upgraded by CDP one of the most serious and respective platforms for environmental reporting to be which is the second highest level.
This past week, we received our scoring by echo of at least one of the world's most comprehensive rating tools, our score improved five points to 77, earning us a gold medal and putting us in the 99 percentile a huge improvement from our score of 52 in 2018, we also achieved.
The FCC certification for our bio circular grades from three plants.
Third our team increased our dual fuel flexibility in Europe as of today, we can reduce natural gas usage by about 35% to 40% the natural gas prices in Europe may have passed for now, but this provides us with great flexibility as we move forward.
I am proud to say that the team kept the new plant in China on track. Despite many challenges in the fourth quarter before the Covid zero policy was lifted Covid finally came to why they are.
Our site was locked out but was forethought and quick action, we were able to host the construction crew at our plant, meaning they were living at our site. We made sure that workers are well taken care good food entertainment and comfortable living accommodations to ensure that worker health and safety were not compromised.
Yes.
Then after Covid zero was lifted we had to work through a huge wave of COVID-19 infections. Thanks to their prompt action and dedication we remain on schedule and budget and are currently commissioning facilities.
With these and several other key items like our announced expansion of acetylene base conducted capacity higher earnings power and increase cash flow. We are on track to our mid cycle adjusted EBITDA capacity of $500 million and our confidence in this.
With that I'll turn the call over to Jeff.
Thank you Corning.
I have quite a few slides with detailed charts and graphs I will touch on each briefly but encourage you to spend more time reviewing them.
On slide four consolidated full year results were strong with full year revenue gross profit per ton and adjusted EBITDA. All record highs revenue was up 31% to over $2 billion and adjusted EPS grew to $1 96 from $1 73.
In 2021.
This slide provides some key full year metrics for our rubber and specialty businesses I will talk in depth about each business shortly.
On slide five you can see the consolidated key factors for the full year 2022.
The base price improvements and mix gains across both businesses far outweighed, the lower volume which occurred in specialty boldly.
In fact rubber volume was up 3% in the year.
We had a strong FX headwinds in 2022 as the average euro to dollar exchange rate went from 118 to 105.
The full year EBITDA increase of $44 million occurred despite this $26 million FX headwind.
On slide six looking at Q4, despite a small decline in volume our continued strong GP per ton helped us achieve a 25% EBIT increase and an adjusted EPS increase of over 40%.
Slide seven provides some additional insight of the drivers for Q4s adjusted EBITDA, we continue to see the benefit of base pricing and mix in both businesses and high cogeneration profitability.
On to slide eight.
Looking at specialty in Q4 volumes decrease as we expected, reflecting weaker global end market demand and customer Destocking. However, revenue was flat due to improved price realization and mix offset by the aforementioned lower volume.
Adjusted EBITDA decreased 18%.
Note that gross profit per ton continues to be strong both in the quarter and the trailing 12 months.
You may recall that at our Investor Day Corning shared the earnings power of our highest value most differentiated specialty products had an EBITDA capacity above $80 million at 40% EBITDA margins.
This part of our portfolio delivered as expected in 2022, and this along with price realization and the positive impact of new products helped to improve our per ton margins by over 20% compared with Q4 last year.
Slide nine shows the key factors affecting adjusted EBITDA for the specialty business compared with last year as noted earlier volume reduction was significant particularly in low value products. The.
The volume decrease was nearly offset by improved pricing and mix as well as higher cogeneration benefits.
Slide 10 looks at the rubber business in Q4 with improvements to all metrics on a year over year basis.
Volume increased in the Americas, and APAC, specifically in China and Korea as.
As we believe customer customers value, our reliability and quality.
We also continued to benefit from strong pricing.
Gross profit per ton was $350 in the quarter, we continue to see a nice upward trend in our trailing 12 month gross profit per ton now at $3 36 up sharply over the past two years.
This reflects the 2021 pricing cycle, which was driven by our requirements to begin to achieve an acceptable return on our air emissions quality.
Air emissions control related capital and operating costs.
As Corning noted, we expect another significant step up in 2023 with price alone expected to move our GP per ton well above $400.
Slide 11 shows the key factors affecting adjusted EBITDA for the rubber business strong base pricing and mix were all favorable as it was cogeneration income.
Before I pass the call back to Corning I'd like to provide an update on our stock buyback program that we announced in November .
To date, we have repurchased.
Over 800000 shares which is a process, which was approximately one 4% of shares outstanding.
We have spent approximately $16 million or nearly one third of the approved $50 million authorization.
As I noted on the call in November we expect this buyback to be completed in a couple more quarters likely sometime later this summer.
I will turn the call over according to discuss our 2023 guidance capital expenditures and cash flow expectations and comment on our multiyear growth path.
Thanks, Jeff turning to slide 12, despite the uncertainties in the global economy. We are confident in our business and are establishing guidance for 2023 of $350 million to $380 million up 17% at the midpoint.
We provided a split of our guidance for our two business segments. This is not something we would normally provide but we believe it is particularly helpful. For 2023 note that we have bracketed our 2023 rubber EBITDA figure from what we shared last quarter. This reflects a softening in our.
<unk> of miles driven.
If European power rates moved up or down by about 20% the impact on our P&L with all the gives and takes would be about $10 million. Our adjusted EPS guidance range is $2 30 to $2 60, a share up 25% at the midpoint.
We plan to invest approximately $235 million and capital spending, let's move to slide 13, and I'll provide some additional color on that.
With our third plant now online.
We only expect to have about $25 million of U S air emission controls spending less for our final project.
This will probably be the last time, we speak about U S air emission control spending as it will no longer be particularly significant.
And as that spending tapers off we expect to have the bandwidth and cash flow to take on some of our backlog of smaller high value projects.
The slide shows the components of 2023 spending we've also given you some color commentary for modeling purposes.
As shown on slide 14, we expect significant discretionary cash flow of $200 million to $240 million and free cash flow bracket at around $100 million as our cash flow increases, we will balance our capital allocation decisions between investing in high value projects.
Lowering debt and returning cash to shareholders.
Looking at Slide 15, we believe that the intrinsic value of the company and our projected cash flows greatly exceeds our share price with our value creation mindset earned pricing and steady progress on our projects. We are confident that we have the building blocks in place to make a step change in our cash flow.
And adjusted EBITDA to reach our 2025 goals.
Now before I wrap things up I want to point you to slide 16, as I mentioned earlier in the call. We firmly believe that our rubber business gains are the new baseline from which we can grow.
The fact remains that demand continues to outstrip supply for rubber carbon black in many of our key markets. You can see clearly that North America. The supply demand balance has shifted over time and we expect it to continue to be tight for years to come.
Underlying demand in North America is increasing due to planned onshoring of tire production, while high carbon black investment costs discouraged significant new carbon black capacity.
In Europe . The situation is complicated by the war and its impact on Russian supply to Europe significant amounts of Russian carbon black continue to flow into Europe and remain in some customers supply chain, even at some of it now flows to China for this reason coupled with an increase.
And the European tire capacity, we believe the European carbon black market will tighten further.
In closing I would ask you to consider a few thoughts first 2022 was a record year for us and I believe 2023 is going to be even better.
Second since becoming a public company, we have grown through periods of low oil prices as well as high oil prices and we have demonstrated through those periods how resilient the business is.
We are a specialty chemical company and we are determined to achieve our specialty valuation.
Third due to continued supply demand imbalances for rubber carbon black we believe our rubber contract pricing and terms are the new baseline.
Fourth our team has proven their dedication and agility during challenging times, we have momentum in sustainability in our markets in our new products and with our customers. The Orion team is well positioned not only for 2023, but for years to come.
Finally, considering all these factors we are well on our way to significantly increase earnings and free cash flow in line with our 2025 mid cycle earnings and cash flow capacity goals. The foundation that we've laid over the past few years is now evident in our financial results and outlook.
Thank you.
Greater please open the line for questions now.
Thank you.
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Thank you and our first question comes from the line of Josh Spector with UBS. Please proceed with your questions.
Yeah, Hi, Thanks for taking my question and first I guess, congrats to you and the team on a pretty solid end to 2023 here a lot of big accomplishment.
Thank you Jeff So my first question, Yes youre.
Youre welcome.
So first question just in specialty.
Your guide is kind of close to annualize, Inc. Fourth quarter, and I mean, clearly that's a quarter a pretty challenging volumes down 20% plus year over year. Most companies are saying delek annualized fourth quarter, it's not the right run rate when I look at some of the things you guys have new capacity coming online.
Maybe some raw material costs coming down so I'm just wondering what what's your bridge to basically flat to slightly up in specialty next year from where we are today.
Well first of all I'd say, our forecast is more like second half repeat even going into this year I think the markets in China are still pretty challenging even though COVID-19 zero policy is still behind us.
So that's kind of how we see it right now and when we talk to our customers.
Yeah.
Okay, I guess, maybe when I dig in a bit more there is what should we be assuming for Huawei and what kind of when that comes online and the contribution there any changes from your prior comments.
So I think on Huawei and in specialty in particular, theres going to be a qualification period associated with that so I think we see more of that contribution in the second half were in start up right now.
So you can say there would be qualification volumes going out into the second calendar quarter and you'd start to see more of that loading in the second half.
Okay.
And then if I could just ask on I mean, I did think slide 16, it was pretty interesting on the supply demand I don't know if we've really seen a sustained under supply.
What happened it needs to happen in North America are prices still not at a point, where you'd see incremental investment in closing that gap if prices move up is there demand disruption what what's the scenario that you see playing out.
Well, if you look at our curve, we do see some incremental investment going on right. The situation with model is why it is well understood very a lot of capital going into that additional capacity, but is there I think that creates a bit of an overhang from anyone wanting to make further investments as well as just an assay.
Estimate there is there are some other very attractive areas. For example in conductive carbons. So I think the U S market is going to remain tight I think what we achieved this year as I said in the call are like the New Foundation, the new base I do think there is upside from it.
Okay. Thank you.
Our next questions come from the line of Laurence Alexander with Jefferies. Please proceed with your questions.
Good morning, So I guess, just a couple of follow ons to that so first when we look at the specialty business. The gross profit per ton improved by about 100 and.
2100, $30 million year over year in a pretty soft environment in China and Europe .
What do you think gross profit per ton will do in a synchronized global recovery or acceleration period.
So one element of that just keep in mind.
Correct. When you said it was went up about $130 per ton I think is the point that you need to make our than you intended to make there. So a big element in our GP per ton is always going to be mix and so what you see here is the great strength and like our most differentiated products.
When we see volumes coming back in in areas like Master batch and so forth, we'll have an advantage in terms of greater.
Loading and absorption of fixed costs.
And we also see a little bit of the dilutive impact of it. So I think if we were going to say in the eight $900 range for GP per ton is probably a fine number in terms of modeling John or Jeff do you want to add anything to that and I think that that makes sense. So I think if you look at the weighted average of as we see volume coming back in.
We could see the GP per tonne in 2023 actually lower than 2022, just because of the low end volume as you noted.
Alright, and then secondly, given.
Given you have already have contract price contracts extending into 24 can you give a sense for how much.
Net tailwind you already have baked in in 24, just on the contracts you've already signed.
I see that it's somewhat.
Commercially sensitive what we have in them, we do have upside going into 'twenty four on that.
Okay, and then lastly, four.
$450 million of free cash flow on your mid cycle estimates over the next three years.
Can you give a sense for.
Capital allocation.
Possibility of adding the bolt on M&A or adjacencies or kind of how you're thinking about what that flexibility employees from what you can do next.
Yeah. So we look at this and aspire to always have a range of options open for us where we've done the work to carry that so called real option buying that acetylene plant years ago. It took years of work to get it up to lithium ion batteries standards, but we're there and then that creates the option to do something like.
What we're doing in La Porte right now so when we look at that we will make a decision balancing out between returning more cash to shareholders between continuing to invest in expansions lets say debottlenecking that kind of an expansion in our core business as well as opportunities for.
Other growth, which could be something thats, a very very near adjustment it could be doing more assembly in the connectivity space, where we are right now I think there's really a variety of options open to us Lawrence for growth and at this point, we're enjoying having those options we're going to be very careful stewards of this capital.
Spend it well, it's the shareholders' money not ours and just leave ourselves those options for right now.
Yeah Laurence one additional thing we could also look as we will to some extent in 2023 and reducing our debt a little bit too.
Yeah excellent.
If nothing else that allows you that dry powder in the future also.
Okay, great. Okay. Thank you.
Thank you.
Thank you our next questions come from the line of John Tang Lin Tang with CJS Securities. Please proceed with your question.
Hi, Thanks for taking my questions and really nice quarter and outlook here. My first one is what really changed in the FCB market compared to when you last reported I think the outlook. When you gave that when you. When you do report the Q3 was fairly.
Uncertain or even die or maybe so what came in that wasn't expected and I guess as you look forward is that a continuation of the same strength or is it different contracts that youre looking at.
Or maybe just an upgrade in the macro outlook that youre thinking can help us understand the delta there.
Sure I would say really two things number one specialty volume, particularly the premium volume held up well and better than we had expected number two the whole EU power cost versus natural gas cost that that balance was better than we expected and from our perspective when you look now.
And into the coming year I do not think we're going to see a repeat of last year.
I think natural gas prices were kind of artificially pumped up by the almost mechanical buying as some of these nations to fill their their.
Storage facilities, so we see that the energy market as being a bit more stable in Europe going forward for the coming year, but it was really those two things came in a bit more favorable than we had anticipated.
Okay, great. Thank you and then just looking at the cash flow for next year. It looks like Youre getting a fair chunk from working capital releases, which is really nice to see I was just wondering how much of that is just the natural swings and movements in well in energy prices versus some kind of permanent reduction and and you know.
Working capital needs at your new contracts with some other other thing thats going on.
But what should we expect going forward.
Sure Jim I think the numbers for 2023 are primarily a permanent reduction in around the terms that are particularly out rubber contracts, we talked about that a little bit last quarter that along with pricing, we were able to negotiate better cars and thats really where that reduction is coming in you will see it.
If you look in the fourth quarter, we saw a reduction in working capital.
In the quarter.
Pretty strong one and that was related to oil prices coming down in the fourth quarter of 2023, it's really focused on the permanent reduction in.
From our.
Or customers.
Our customer contracts and do I think one thing that's notable and that as we've moved up the pricing significantly which would normally increase your working capital in this sense in terms of the hour and it just shows the importance of improving these contract terms.
Got it thank you and then.
Finally, just.
Maybe just to rehash the capital allocation question, I mean 100 million of free cash flow, even after investing in all of the growth you want to do.
You have a repurchase plan, which will cover all of it.
Are there any other high return options that you're looking at specifically in terms of either repurchases organic projects that may be.
Starting to look interesting just help us understand what that May eventually be used for you. Even if you don't spend it this year 'twenty four 'twenty five.
Okay.
John I'd like to convey a sense of being a good steward of this cash so we're not acting like it's burning a hole in our pocket.
The easiest outcome for all of this and a good outcome for us would be with just added to that last comment would just be reducing our debt ratio and that's a fine way to take some of that we will later in this year as we come towards the conclusion of our first share repurchase decide if we want to do more on that.
We might green light some other projects we have other high return projects large and small will kind of see at that time, and I think deferring that to see water business conditions. What's most attractive at the time is is a positive for us.
But at the worst we simply reduce our debt ratio, which for Orion would be a fine thing to do right now.
So we really don't have.
You know like a pressing need we have to move that one way or the other right now let's be careful.
Fair enough. Thank you for that actually if I could squeeze in one more I was just wondering how much room is there for pricing increases in 24, just given the scale of supply demand imbalance if youre expecting.
Is it going to be to the same degree as this year is that possible or is it going to be more muted just given you're already locked up.
It seems like half of your of your clients and longer term contracts already.
Right, Yeah. So no we've locked up a significant amount for next year more than half of our volume not much more but a little bit more than half for next year. So I don't expect the same sort of a step up particularly in North America as I said I think the situation in Europe is a bit more dicey was still.
Decent dependency on Russian carbon black I think thats the market that.
Could could see much more pressure for next year.
Yeah.
Great. Thanks again.
Thank you John Thanks, John .
Our next question comes from the line of Jeff Zekauskas with Jpmorgan. Please proceed with your questions.
Thanks very much.
Hi.
Can you remind me when Youre Ravenna expansion came on.
The size in Europe , and have you sold all those tons.
Yes that came on in approved for commercial sales I want to say the end of February and by March that was sold out.
End of March.
Yeah.
And do you.
Those tons are allocated to specialty or to your rubber black.
So we had already.
Committed a certain amount of that volume.
Before the invasion of Ukraine.
And after that invasion and there was then suddenly great interest for rubber carbon black made in Europe . So a portion of it had already been committed a lot of that into the specialty market. We were about to do a multi year agreement on the specialty area. When all this happened and given that we do.
Then reallocated almost all the remaining capacity over to Robert So it's a mix, it's more rubber than specialty I'd say at this point.
It's a little bit of a change in our plans but.
That's been a win win for us and our customers.
So did your European volumes grow in the quarter and shouldn't they grow a lot given the new capacity is Scott.
Well, so we have that in our last year's results for three quarters of the year.
We did not see a big step up in our European contracted volumes I think perhaps we had a different view of what's the appropriate market pricing in that market is and some other people.
For us Thats, referring now looking forward to 2023.
Okay.
Sure.
Did your specialty volumes.
Growth sequentially in the first quarter or they should be down a lot year over year is that right.
Oh that little bit.
Or maybe give us a little bit of an outlook for the <unk>.
First quarter, because your specialty volume.
<unk> came in in the fourth quarter.
Is there the same kind of weakness that you will you expect in the first quarter.
I think as we look in general at this coming year I think like many players we would say the first quarter might be a little bit weaker than some of the later quarters Covid zeroes over in China.
And the consumer in China is buying a lot of services, but I think the consumer in China is slowed down in terms of let's say manufactured goods and real estate there still remains a bit of a challenge.
He had the Chinese new year, and all that so I think that.
Q1 for this year will be.
A little weaker seasonally than than perhaps normal and lag certainly Qs two and three Jeff you want to add something sure. Jeff I think if your question, maybe or maybe I'm over reading into your question.
Our Q1 specialty volume relative to last year last year's Q1, if you looked at last year's volume by quarter in specialty it came down.
High acuity was quite high in Q1 came down in Q2, and then it came down in the second half of the year versus both Q1 and Q2.
And I think the.
We've talked about before a lot of that was on the lower end from a volume standpoint, if we were looking at volume going into 2023, I think starting the year off closer to the second half of the year. So recognizing that low end volume is still not not come back yet I think there's probably an appropriate way to look at it yes.
What was your co Jen credits for the quarter and the year and where do you book.
So we don't we don't give details on our co gen, but the split between both of our businesses relatively equally.
And we talked about you know one of the better one of the.
Reasons are Q4 was perhaps a little better than our expectation, particularly on the specialty side was that we expected.
Co Gen numbers to come down a little further in Q4 than they actually did there was a lot of a lot of angst in the European market. There was a lot of concern about that and it didn't come down as far and Q4 as we expected, but we had our call in November as we look at 2023. According noted we think the market.
The extreme volatility of the market, perhaps has mitigated it won't be much color in 2023.
I think your competitors disclose that.
That kind of information maybe it's the last question.
What's your base case for volume growth.
Two segments, so you're expecting I don't know two or 3% growth in both segments and volume terms.
But let me just first speak to the disclosure I think all in all our level of disclosure is pretty good we see some commercial sensitivity on that one.
And we gave some guidance in our prepared comments about what a 20% move in power rates might look and how scarier really scary that would be for us.
Although volumes looking at 2023.
November call noted that we expected rubber volumes year over year to increase about 30 K T. I think that's still a fair number to use at this point in time with regard to specialty volumes again, we've got a very high Roe.
In the second half of the year much higher first half of the year volume level last year, I think going into 2023 would probably be reasonable to start the year.
<unk> 20 at the second half of 2022 volumes and then as we go through the year, perhaps you'll see a little bit of improvement.
On the volume side of the specialty.
I think the year over year, given the high low value volumes, we saw in the first half of the year I Wouldnt expect the year over year improvement in volume dependent I would expect the year over year decrease in volumes again to be more in line with what we saw in the second half of the year with perhaps an improvement in the second half of <unk>.
2023, but not to recover what we lost in the first half of 2022.
As a reminder to ask a question today you May press Star one.
Our next question is from the line of Chris cash with loop capital markets. Please proceed with your questions.
Hey, good morning.
My first one is about <unk>.
First wanted to follow up on the.
Comment about as much as half of your.
And in the rubber black side being I guess multi year now.
I'm, assuming that you know.
Meaningfully greater than maybe historic norms curious about like given the dynamic of kind of the.
Desire to fake Russian suppliers in Europe , and then the structural tightness in North America is the propensity of the customers don't want to do multi year deals is it greater in one of those regions versus the other or is it sort of balance I'm, just trying to understand how motivated they.
They are to do that or is it really a mutual sort of commitment.
But definitely it's a mutual commitment right back and forth first of all Chris you're absolutely right. It is an increase from historical levels, which was probably more in the 'twenty.
25 to one third 25% to 33% of our volumes were on multi year.
Typically there will accompany a customer cutting across multiple geographies.
So in that sense. It really does end up being balanced none of that prevents us getting together next year, and saying I'd like more right.
All possible as well so I think all of those remain options.
And I understand that commercial sensitivity, but just to make sure I understood. What you said about when you said you have upside in 'twenty court, that's pricing upside as opposed to volume upside with those customers in the lanes and yes you are.
Are you, saying, you're the magnitude of the pricing upside Youre, just not going to talk about is it it sounds like it's a little bit more pronounced in Europe , and North America that.
Yes, So let me hit a couple of things first of all good good clarification, Chris and let's go even one further price of course has all these multipliers for oil and input cost. So lets talk margin I mean margin enhancement. However, the improvements for next year in those contracts are not in the same math.
<unk> of what we achieved this year just to be clear on that we took the step change up this year front end loaded that there is some element of improvement for next year, but I wouldn't want people to be assuming like it's another step change like what we just achieved for this year.
And I wouldn't say, there's a big difference in those are how those work from one geography to another my personal belief and our belief is more bright confident and this is the Russian carbon blacks still going into Europe and that remains a vulnerability for the European market and we might see.
Well see some time between now and the contract season.
The desire for non Russian carbon black to come back into the market and that would push up pricing for next year, not where we have a contract necessarily but for those who arent served under contract right now and I think we also see.
Increased need for volumes in Europe .
Yes.
Okay I appreciate that and then.
The.
Looking at that chart.
With the structural tightness kind of skewed North America I guess.
And you've kind of.
Winding down your EPA investments I'm just curious it.
To what extent you can focus on sort of for lack of better term operational excellence to improve.
Improve your process technology to Eke out extra incremental tonnage to address the underlying growth associated with the end market and the onshoring and so forth is that an opportunity for you.
How would that manifest in terms of unit margins over time.
Yeah, Chris you understand as well I think that kind of an investment is what could make sense in north America or further in Europe , rather than a new reactor line or a greenfield I think the capital costs for those sort of projects would be very.
My opinion not be very attractive I think things like the Debottlenecking would be that's why when you look at our slide where we lay out our capital spending for next year, we put in about $40 million of Debottleneck small expansions improvements in plants up to out increasing yield uptime those sort of things.
We could have instead taken that is more free cash flow. We thought that was a good use of our cash low risk projects for us we know the demands there and we're confident in that so I think that kind of a project you can see.
Don't think however ourselves and perhaps competitors doing that I think even with that in North America, it's going to remain very very tight.
Right got it and then.
Just one follow up on the specialty.
And I get that the mixed dynamics, you're talking about like master batch as being towards it probably feeling the brunt of this sort of destocking dynamic in the polymers industry.
And that being lower margin ways.
And enhances the appearance of mixed right now, but the other area, where theres been absence that strength is automotive, which carried some of your highest margin application. So I'm wondering as automotive builds are higher in 'twenty three and some some would argue it could be higher for a couple of years is the chip shortage obey.
<unk>.
How does that feed into this.
Gross profit per ton, you're talking about in specialties when it all comes out of the watch.
Yes, so that obviously is.
A positive for us as is some of the Debottlenecking we've done in that area. So that's.
That's in our factors when we came forward with our guidance, but yeah. That's a net positive for Orion and I think we will be for several years yet to come.
All issue of Master batch, we know that one of our competitors also it makes master batch they brought back on their European line, and I think for our customers who compete with them.
That also probably pictured in a little bit into some of the Destocking. We've seen is they've come back in and oftentimes people re enter markets.
With price.
Thanks for the color.
Alright, Thank you Chris.
Thank you at this time I will turn the floor back to Corning painter for closing remarks.
Thank you everyone for joining us today I'd like to leave you with this thought.
Rubber carbon black is not the commodity southern seem to think it is yes. Most of it sold to international ASTM standards, but its a differentiated chemical is largely a regional business rewarding local capacity and it requires air emission permits raw materials. In addition to our plant came.
Mobile are making exacting rates I.
I would suggest that you look at this business based on the dynamics, we've laid out on this call. Thank you very much for your time and have a good day.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.