Q2 2023 Orion SA Earnings Call
Greetings and welcome to the Orion Se second quarter.
Earnings Conference call.
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A brief question and answer session will follow the formal presentation.
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My pleasure.
Sure.
Andy Wilson head of Investor Relations. Thank you Ma'am you may begin.
Thank you Kyle.
Morning, everyone and welcome to <unk> conference call to discuss our second quarter 2023 financial results.
Wendy Wilson head of Investor Relations with me today are Corning painter Executive Chief Executive Officer, and Jeff White, Chief Financial Officer.
Issued a press release after the market closed yesterday and we also have posted a slide presentation to the Investor relations portion of our website.
We will be referencing this presentation during the call.
Before we begin I'd like to remind you that some of the comments made on today's call are forward looking statements.
These statements are subject to the risks and uncertainties are described in the company's filings with the M. P C and our actual results may differ from those described during our call.
In addition, all forward looking statements are made as of today August 10.
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 tables 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 earnings Conference call. As you can see on slide three we had another excellent quarter second only to the first quarter naturally making for record first half performance. Our results reflect the hard work of the Orion team fundamentally transform.
From the company.
Providing the industry, leading products customers demand and returns on investment.
There's dessert we've.
We've been aided in this by a restructuring in the broader marketplace that has been building for years in our key markets has now passed the tipping point and still continues to build we continue to be one of the few specialty chemical companies on track for a stronger 2023 compared to 2022 and we.
<unk> record profitability this year.
We delivered second quarter, adjusted EBITDA of approximately $87 million, a 5% increase year on year and adjusted diluted earnings per share of 53.
This resulted in record adjusted EBITDA of approximately $188 million for the first half of <unk>.
13% increase year on year and record adjusted diluted earnings per share of $1 27.
We also delivered strong second quarter operating cash flow reduced our debt level, while also completing our $50 million share buyback and starting on the new buyback.
We expect to generate more than $200 million of discretionary cash flow this year, reflecting a conversion rate of over 60%. This is a huge step for us, which we expect to maintain Jeff will discuss this further.
As you have seen we recently published our 2022 sustainability report I highly recommend that you take the time to read our sustainability is central to our strategy in specialty this manifests in conductive additives and in rubber it's a circular economy.
A concrete example of this is our acetylene based conductive carbon.
They are ultra clean highly conducted and there were some production mode from the limited availability of high volume.
70, <unk> gas stream.
We continue to make progress on the construction of our acetylene based conductive additives plant in La Porte.
Beyond that we expect to add additional capacity in North America, and Europe coming on stream in the next three to five years congratulations to the entire team who is bringing our strategy to fruition as we continue to operate as a responsible corporate citizen to all stakeholders.
On the operations front specialty demand, reflecting the broader manufacturing economy is subdued.
We see this as an opportunity to push customer qualifications and upgrade our plants, while things are slow. Meanwhile, we preserve value.
We preserve the underlying value of our business by maintaining and segment per ton profitability.
In rubber as I mentioned earlier, we believe the industry restructuring is evident in our results will continue.
The situation is simple.
Industry supply dynamics, coupled with our commitment to get a return on invested capital that we as a company you as shareholders deserve.
Driving the reset to more balanced price.
'twenty 'twenty four negotiations are well underway. We currently have about 60% of our Americas and EMEA demand committed or in late stage negotiations.
Well ahead of past schedules.
The pricing outlook remains positive for 2024, and we expect to pick up volume at our price points.
A couple of items.
First I remind you we are negotiating for 'twenty 'twenty four and beyond not for 2023 health care, a slow demand in 2023 and his contacts except that one year's deferred demand is the next year's supplemental debate and that supplemental demand further tightens the market.
We are actually negotiating.
Second there is a growing carbon black and balance in our key markets, where tire capacity continues to be.
Third the EU ban on Russian carbon Black starting next July combined well.
OEM concerned with Washington content in their supply chain further benefits European carbon black producers.
Our investments in maintenance emission controls and reliability and abatement costs. They all of them at higher prices and fifth the expected rebound in replacement tire demand, it's a tailwind.
These five largely structural improvements in our markets are positive drivers for us.
All in all that customers want strong healthy suppliers.
Speaking of the babies were the only carbon black producers, who have completed three air emission control projects in the United States. We have one more plant to go which we expect to have behind us entering 2024.
Now, let's talk about Destocking and defer starting with Robert.
We supply tire manufacturers, they supply tire dealers and.
Large tire retailers.
Naturally a tire retailer sells to the end customer who is the most important player here.
On the bottom of slide four you can see the passenger car and light truck owners are driving more than last year on.
On the top of the slide you can see there are differing buying replacement tires I use the term deferring because those tires are getting more and they will need to be replaced just look at the gas and miles driven.
Trucking companies, they're seeing a decline in loads enhanced buying fewer replacement tires that makes sense going forward you should look at Manny.
Manufacturing PMI get an understanding of where that is.
Now all of this is based on U S. We don't have good fast.
Gasoline or miles or kilometers driven in Europe . However, we believe the picture there.
There's also the question of inventory levels higher manufacturers distributors and dealers each Pete.
There's less visibility however, our understanding is that inventories are relatively low and there is little interested restocking.
Until end customer demand picks up.
On top of this our customers expressed limited confidence in their demand forecast accuracy.
Switching to specialty here, we serve dozens of end markets in general customers want low inventories and enlarge the Apple.
There was little interest in restock.
Both rubber and specialty we expect annual customers to defer purchases until the start of 2024 and manufacturers to take extended holidays. This summer and winter. We in turn will use this time wisely preparing for 2024 and not destroy value by chasing volume.
With that Jeff, perhaps you could provide some more color on our financial results.
Thank you good morning on slide five you can see the continued path of growing profitability, even with the headwinds in our end markets.
Twenty-three, we expect at the midpoint to grow EBIT was 7% versus the full year 2022.
And while not shown here EPS is expected to grow 9%.
Our portfolio is a combination of the rubber business, which is benefiting from price increases and a more than offset the near term volume challenges and our specialty business, which has kept stable pricing with its high value add products.
Specialty too is facing near term volume headwinds.
But the 50 plus percent growth in rubber EBITDA in Q2 and in the first half of 2023 has allowed us to deliver respectable earnings growth.
Below you can see our continued rosy progress over the past few years during that time, we made substantial air emission control investments.
The rosy levels, we achieved are significantly in excess of our weighted average cost of capital.
Well she stands at 17%.
This key metric keeps us aligned with our shareholders as stewards of their capital.
And focusing on the long term sustainability of the company.
Now some more details.
On slide six of the controller consolidated results for the second quarter.
Contractual price improvements through rubber outweighed the lower volumes in both businesses as well as lower cogeneration revenue.
The year over year, adjusted EBITDA increase of 5% in the second quarter of 13% in the first six months of 2023 are a direct result of better pricing in rubber.
You May note that the adjusted EBITDA is down in the second quarter. Despite the increase in EBITDA and adjusted EPS I'm sorry.
This is a combination of the higher tax rate in the quarter.
Couple of adjusted items to net income, which went opposite of last year.
Slide seven provides a year to date results for.
So the first half of 2023 adjust.
Adjusted EBITDA is up $22 million or 13% and adjusted net income adjusted diluted EPS are both up 10% also.
All three of these are record levels for six months.
We achieved this despite a 50% drop in European power rates, which based on what we shared last quarter how's it by the $25 million.
Annual impact.
If rates hold where they are now we expect that additional $2 million to $3 million per quarter impact next year, when certain hedges that we've put in place for 2023 expire.
We do expect reduced power price and co gen volatility going forward.
On slide eight the improvement in rubber pricing fully offset the volume decline in Q2 our.
Our view is that the price improvements in rubber are due to the structural shifts in the market, while the volume declines will reverse next year.
On to slide nine looking at specialty in Q2 volumes decreased in most markets, reflecting weakness in the manufacturing sector.
Gross profit per ton decreased compared with an extraordinary Q2 level last year.
Our trailing 12 month gross profit per ton was also down but above our average levels in 2022, and then the 800 to $900 per ton range. We have previously discussed.
We do not view this quarter GP per ton negatively, but rather it is near the expected range for this business.
Importantly, the mix of products that we sold in the quarter, our pricing remains stable, we have not chased volume by dropping prices.
Slide 10.
Those are the key factors affecting adjusted EBITDA for the specialty business compared with last year.
As noted earlier the volume reduction was significant.
Margins were affected by fixed cost absorption and lower cogeneration revenue.
As I noted on the last slide pricing was stable for us.
The market conditions, we believe this reflects the strength of our value proposition.
Yeah.
Turning to slide 11, the headline is that Q2 rubber EBITDA was up $19 million or 51%.
In the first half EBITDA was up $43 million or 54%.
But price improvements generated strong profitability metrics, despite lower volume and lower oil prices.
Gross profit per ton was up from $303 $309 to $429 in the quarter driven by price improvements.
Should expect the GP per ton to be at similar levels.
Major of 2023.
Slide 12 looks at the key factors adjust affecting adjusted EBITDA for the rubber business strong base price is clearly the key driver offsetting the lower volumes and less advantageous geographic mix.
For clarification, we gained volume and lower margin Asia, while we saw a decreased volume in the higher margin regions.
On slide 13, I'd like to provide an update on cash flow and the impact on our debt level and stock buyback.
With strong cash flow in the first half, we funded $20 million in share buybacks in the quarter $49 million year to date and $54 million. Since we started our buyback program in Q4 2022.
This represents 4% of outstanding shares.
As discussed during our Q1 call as expected we completed our initial $50 million share buyback program in mid May.
Purchased an additional $4 million in shares toward our new buyback program in the rest of the quarter.
We will pace, the new buyback program slower and prioritize growth and profit enhancing projects first and as long as we stay in or near our target debt range. We plan to continue to look to opportunistically repurchase shares with a portion of our free cash flow.
We reduced our net debt an additional $39 million in Q2.
$76 million in the first half of 2000 $23 million to $783 million.
Our debt to EBITDA ratio now stands at 234 times down from 275 times in December and nearly three times at this point last year.
As I look forward across the rest of 2023.
I expect our debt level will stay near this.
Here, where it is now it may increase a little since our Capex is back end loaded in 2023.
We benefited from lower Capex in the first half of the year.
On slide 14, before I pass the call back to Corning, you can see the dramatic increase in our discretionary cash flow conversion as we have stepped up our profitability nearly completed our EPA projects.
This gives us much more flexibility to invest in growth projects reduce our debt and opportunistically buy back shares.
I expect the 60% plus conversion rate that we have in 2023 to continue in the coming years.
With that I'll turn the call back according to discuss our 2023 guidance.
Thanks, Jeff turning to slide 15.
As we both said earlier, we continue to believe we will report another record year. We also believe that we're in a strong position going into 2024 with about 60% of our Americas and EMEA rubber demand already essentially committed.
For this year, we expect end customer purchased a pearl and Destocking to continue into Q3 and Q4.
We also expect the lower power prices in Europe to continue to prevail taking that into consideration we are upgrading our adjust updating excuse me our adjusted EBITDA guidance.
To the $320 million to $350 million range, which is up over 7% at the midpoint.
Our adjusted EPS guidance range of $2 to $2.25 per share and up 9% year over year at the midpoint.
In closing I would remind you that first our specialty business is doing well naturally volumes are down when manufacturing activities down however, our unit margins, reflecting the strength of our business is holding at high levels. Meanwhile, we're driving our future growth.
Regressing are conducted additive plant in la Porte and advancing customer qualifications across many markets.
Second we believe the step up in our rubber pricing is necessary and at a sustainable level from which we will grow.
Third the current disconnect between miles driven gasoline consumption and a replacement tires is not sustainable.
Those tires will need to be replaced also the OEM market, which drives our higher margin specialty and <unk> businesses has begun its recovery.
Four with higher profitability in the U S air emission spending nearly behind us our cash flow conversion has improved dramatically.
I continue to see a great future for Orion as a company and as an investment.
Yes, we have taken and the strategy, we've embarked upon and provide a great foundation for sustained profitable growth free cash flow and exceptional returns for our shareholders.
Thank you.
Tayo. Please open the line for questions.
Yeah.
Thank you.
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Our first question comes from Chris Capps.
Capital markets LLC. Please go ahead.
Hey, Thanks, good morning.
So thank you for the details around the characterizing the ongoing tire contract negotiations for next year could you remind us like what percentage of your existing contract already had multi year agreements in place where they were.
Already an incremental pricing baked in for next year or beyond and curious about the agreements that are being resolved now how does the magnitude of pricing that you alluded to compare to those that have already been baked in to the multiyear deals and if theres any way to characterize this by geography.
That'd be helpful too.
Hi, Chris So first of all thanks for your question I appreciate it so we.
We had about 50% of our volume under contract going into it as you said, we had a step up in those contracts going from 'twenty three 'twenty four I expect that we will do better than that with the new contracts that we sign this year, but it's early days, but that's my expectation and I'm I'm.
Okay with that because I think it's a better allocation of risk getting commitment between the companies and we're prepared to do that sort of thing I think that's a good development overall for the industry I'd say in general there is.
More interest for people to get the contract quickly in Europe , right now and versus North America, or South America, just because of the offset there with the Russian capacity, which was probably about 35% of that market. Some customers as we estimated as much as half of their carbon black was coming from <unk>.
Russia. So there's there's certainly some people who are quite interested in that I think did I Miss anything there Chris.
No.
That covers it that's helpful and then the follow up would be.
No I like the way you characterize the bearing destocking, presumably represents deferred or latent demand incremental demand for next year, but so assuming that this destocking runs its course.
Let's just say by calendar year end than theirs.
Normalization in demand trends next year is there any way to characterize what you think that the industry capacity utilization rates would be by region.
Who are the core rubber black mountain specialty areas. Thank you.
Sure. So just to clarify I mean, I think you know.
It's not one day whenever a customer decides okay I'm going to stop deferring I think we'll see that turning in the fourth quarter I don't think we use the company will see the impact of that until January just because in the fourth quarter, you've got holiday shutdowns in that kind of things I think it's that kind of a timeframe it's been a relatively low.
Long deferral, what I think that means for our spend going forward is rubber capacity in Europe will be at very high levels and that will be basically where people can operate it at so I would say high eighty's low Ninety's I think North America will also be very high levels.
Of industry utilization again, just because of supply demand, we get back to a more normal run rate in demand I think capacity in both areas will be tight we will have our EPA work behind us.
At least one major competitor will not right. So when they go through that that would probably have an impact in demand our capacity for North America next year.
Helpful. Thank you.
Our next question comes from Jon <unk> with CJS Securities. Please go ahead.
Hi, Thanks for taking my question.
I was wondering if you could give us a little bit more color on the inventories at your customers.
Compared to where they would normally be in the kind of demand environment, how long they can actually keep trying down before they reach a critical level. There are levels that put their business at risk how have your customers actually told you that they're specifically drawing down or is that just more research on your end based on what Youre seeing in the market you know just help us get more clarity on what whats.
Giving you the confidence that things will come back and kind of when they will.
Sure.
So two things there number one is as far as cutting across many different customers in specialty many many and rubber let's say many of those customers.
Don't always expressed tremendous confidence in exactly what is in all of the downstream channel. So I know everybody's interested in this question of Destocking I'll, just tell you I think any customer demand and the differing there, which you can see in that gasoline and miles driven versus replacement tires I really think that's the best.
Data, we have so now more anecdotally when you talk to these guys. They talk about yes, we're at a very low inventory level in end customer demand dropped lower well then that might be a little bit more inventory than they think they need they might be able to draw that down if it steps up a little bit right. They would have to buy a little bit more.
I think they're at low levels I will never tell you it can't get worse or they couldn't destock more but our view is and when we talk to these guys. They all express.
Oh, they unbalanced expressed that they are at low inventory levels, but very reluctant to make a step up in inventory. The one thing we may see in this month is the rise of oil prices. We may see some people buying in front of that in specialty Okay. That'll help August September .
It is very significant.
Okay got it and then.
Do you have any just one other thing you have a few guys who have talked about.
It was a little bit about the comfort that they're like below their safety stock level, but again, that's something you have to really look across the balance of the whole industry.
Okay understood.
As your customers get down to these critical inventory levels, assuming demand stays roughly where it is I mean, how how much leverage does that create on pricing for you guys. You entered the new year I know tire contracts are generally negotiated buy ahead of time, but in the rest of your business Wouldnt that give you also some you know.
A lot better leverage as you enter the new year, you know, especially as capacity remains limited and these guys start to restock.
Well John the way. This game works is the buyers right now are saying Oh demands weak do you need the low do you need to give me a good price and we're saying no no no no. We're not negotiating her trying to titrate renegotiate any of her 2024, that's an obvious thing and the annual cycle for rubber.
It plays out in specialty as well, but the key point here is in specialty where selling pally, we're selling a solution.
So we're not looking to.
I take advantage of the market conditions, nor be a victim of them right. We're looking to keep at a fair price in our specialty and move it off where we need to and getting our new products qualified and basically be agnostic to the current market conditions, but yeah, I mean, I think to an intelligent buyer they can see.
What's going to happen next year.
Okay, Great and then just one more thing can you just break out the impact of cogeneration kind of what what has been your expectation and what had been a change there I guess in the outlook is there.
From that piece of the business.
Sure I can let Jeff kind of warm it just to say when we gave our last guidance right at the end of Q1, we were really looking at what power rates were at that time, and we expected them to just stay where they are or thought that they might actually pick up a bit this summer in Europe , which has not.
It happened and I think it was in my part of the script last quarter. When I said that for every move of about 20% it would be about $10 million and it's moved about 50% down. So that's how you get to a annual run rate of the 25, Jeff mentioned by Jeff anything you want to add to that.
Sure John Yeah, it's according to your point, the 50% reduction in power prices would let's get to getting somewhere in the $25 million range for them from.
From a profitability standpoint, if you look right now.
But key markets I think if you look at Germany, stout about 50%, perhaps a year over year. If you look in Italy, it's down maybe closer to 40, there's not been a step up in the summer time, even though it's very hot there there's not been a step up in summertime power costs.
So we're.
A year goes on we're expecting this lower level to remain which is lower than what our expectations had been industrial four months ago. So we had a little impact in the first quarter, a little bit more in the second quarter and expect a bigger impact in the third and fourth quarter. If these levels remain where they're at and just to keep in mind, though like this is a net positive for everybody.
Right, it's going to be in the European economy is stronger.
Ultimately it help consumer demand in Europe , what are the thing to understand is that we did the hedge last year congratulations to our energy team is a very good timing those hedges will expand expire at the end of this calendar year. So that's going to give us a headwind next year of about $10 million.
Great. Thanks, guys I'll jump back in queue.
Our next question comes from John Roberts with Credit Suisse. Please go ahead.
Thank you <unk> slide 10 has the year over year bridge for the specialty chemical EBITDA. If you were going to build that slide on a sequential quarterly basis, what would it look like the.
The volumes were actually relatively flat sequentially.
Yeah. So.
I would have to take a quick look at that I think that our price mix.
Has not shifted dramatically time on it.
Quarter on quarter volume, Jeff how do we look around the corner I think volume, we might be down a little bit.
Versus a well.
They were on the right hand column.
Yeah.
Can you give the.
I'm, sorry, you're looking Oh.
Alright, sorry, I'm looking at slide nine I'm sorry.
Different different counter our slides got it so I'm sorry. Your question then but comparing these two what in particular would you point to that cause me, yes sequential decline because volume was stable and it sounds like price was mixed significantly negative sequentially.
Yeah mix was.
John I'm, sorry, I was I thought you were asking about looking forward Q2, Q3 Q1 to Q2, you had mix was down.
We talked about the cogeneration piece that hits, our specialty pretty significantly and with the lower volume there was a little bit more fixed cost absorptions are you kind of throw out all of the basket and you can see it really hits. The gross profit line plus we shared last time that a $101 million of EBITDA benefited for some <unk>.
Time and timing effects in a lot of that was in specialty that's partially have the GP per ton was so high in specialty in Q1. So just the absence of those things we're going to take the profit quarter on quarter down a little bit as well, but that alone is probably a third of the reduction.
Okay and then how are your China operation is doing.
So we were a.
Volume positive there were in startup of our new plants I think China is a weak market now that is for sure I think one thing to keep in mind for us is that on rubber.
We are like 100 K T.
4000 5000 market.
Volume market, so for us to find ways to place our product, that's maybe a little bit easier than other folks.
Where we're very busy with the start up and everything associated by that but otherwise tough market, but where.
Fighting it out.
Thank you.
Our next question comes from Josh Spector with UBS. Please go ahead.
Yeah, Hi, Thanks for taking my question.
First I wanted to make sure I understand the cadence through the rest of the year correctly and how youre thinking about the moving pieces I guess from what I've heard so far it seems like maybe there was a $5 million sequential step down because of the co Gen energy dynamic.
It seems like demand sounds a stable ish at lower levels. So maybe youre in the low eighties range for <unk>.
<unk> typically 10% lower or so I mean that gets me roughly to the high end ish of your guidance I guess, what else would be the moving parts in their volume or otherwise to consider.
So maybe I'll just make a couple of general comments and I'll, let Jeff. So just try and go into the specifics for you around it but I would also just say, we and our competitor bolt made quarter made some announcements about how we saw volume. It is a fairly dynamic time I think the industry, meaning the tire guys were.
Apprised for example, about the trucking volumes.
And you know just as we had some positive things happened in Q1, you know these things can balanced themselves out over time, but yeah sure a J.
Alex I think your thought process on Q.
Q3 is probably not too far off I think about Q4, you know typically you see.
So shut up shutdowns by our.
Customers as you know is key.
Corning mentioned earlier, the father's perhaps those shutdowns, maybe a little longer than.
The normal.
I think that's probably up a meaningful impact.
If you look at last year's Q4.
One way to look at our guidance. If you look at the midpoint of our guidance. It would suggest that Q3 and Q4 are in line with what Q3 and Q4 looked like last year.
So we've got the benefit of our rubber pricing, but as you mentioned, we've got the impact of the cogeneration, perhaps we've got.
Our view on volume.
Typically do see a drop off in Q4, and I thought processes with the dynamics going out of the market.
And our customers staying in lower inventory levels that we could see a similar kind of drop off in Q4 of 2023 that perhaps we saw in Q4 of 2022.
Yes.
Okay, no that makes sense and just maybe a little bit near term and long term I guess, a competitor talked about some more some pressure with some of the conductive carbons market pricing and demand I'm curious if you could describe what you're seeing in your it settling black.
Demand and pricing at the moment and also noticed you trend in some of your growth Capex I don't know if you're delaying anything there or if it's just timing of some of those investments just curious on the driver there. Thanks.
Yeah, no the change in our capital is more around execution in looking at certain projects and where we are on the timing for them. We continue to advance. The acetylene project. We also would agree there is China is a more challenging market. There is some differentiation of different materials.
Used in different types of batteries and so forth what I'd add to that is we also see that as an opportunity and add for the LSP. We're also looking at some other products that are better priced for that market and for their needs and the price points that they work out at so given our overall size in.
This market.
We see that is basically an opportunity for us and one that gives us the ability to have multiple tiers of offerings going forward.
Okay. Thank you.
Our next question comes from Laurence Alexander with Jefferies. Please go ahead.
Hi, This is Dan Rizzo on for Laurence.
You mentioned that this the rubber black supply demand tightness I was wondering.
If you would consider adding either brownfield or greenfield capacity and if not what would have to change to kind of make that viable.
Sure.
When you think about making an investment you have to think about return of capital, which means you have to think about what's the right hurdle rate.
And that means you have to think about what's the business model and the current business model, where most customers do a short term contract and by that I mean, one to three years and alright, it's a little bit longer now than it used to be but still very few more than one three years I think that puts you in a certain risk position around adding capacity. So we would.
Really be looking for more of a.
Our longer term mutual commitment between the two parties. They would just give us more surety and without a surety of course, we'd be willing to accept a lower hurdle rate and personally I think that is the way forward for this industry.
And we'll see if we can move in that direction.
So I think we could describe me something more akin to what we've seen in industrial gases weathers that I don't know like a 10 year commitment and kind of co co building that is that we're probably thinking about.
Yeah, So I come from the industrial gas industry I think there's two business models, there theres, where theres dedicated capacity those tend to have a 10 year agreement. There's also more of a merchant approach, which is more like five years is a little more flexibility I think something in those areas is what could make sense to add capacity.
That's our view of it.
Okay and then just one other question I think you mentioned, adding new.
New capacity and carbon additives in Europe I was wondering if I don't know just the fluctuations, particularly in energy courses, maybe have any we think that that building in that region would be better or maybe it's better to export into the region.
Well, so let's be clear, we said that in the next three to five years, we see ourselves, adding capacity in North America and in Europe , I think those will be growing markets right. There's already a pretty large market in China I think that we're gonna see giga fabs of batteries become more democratic so to speak and spread out geographically.
And there's all these things about geopolitical concerns about trade and everything else. So we think theres going to be demand in each space based and that we'd be interested in being their mind you were typically using a byproduct for making our carbon black.
Sorry are assembling conductive material. So that's something that we would look to see how that balance out but to be clear if there isn't a good return on investment we will not do that.
Alright, Thank you very much.
Our next question comes from Jeff Zekauskas with J P. Morgan. Please go ahead.
Jeff Good morning.
Jeff are you there may be on mute.
Whoops, sorry can you hear me now.
Yes.
Sorry about that good morning.
And in the rubber Black area, you said that 60% of your.
Contracts for next year, we're in good shape or signed it.
Is that all Europe or is that does that large number really reflecting the European market.
So let's be clear that is.
E Mail.
And the Americas combined.
Right, but if you strip it out and like how much is in Americas and how much is in and they are because they are very different markets now.
I think for us though.
The percent contracted is gonna be similar and maybe it's a little bit higher in EMEA right now.
Because people are going a little more quickly on that.
Okay.
But when we did last year right. We ended last year with about half of our volume committed that's that was the ratio we chose to take so that was pretty well split between <unk>.
Americas and EMEA.
Okay.
So.
You know in and listening to what all the different companies that make carbon black say.
Yeah.
Some companies.
Point to a more contentious price negotiation.
Are your carbon black prices.
Simply lower in rubber black than some of your competitors historically and so you have more room to raise your prices.
Is that a fair characterization.
So I I don't know exactly what my competitors' prices are the only feedback we get on that is from our customers who are of course very unlikely to lay out. The scenario you just said, Jeff. So I have no idea what their pricing is what their pricing policy is or anything else I'd say these.
Situations, a little bit of like let's imagine there's an airline route and there's only let's imagine.
No you know, there's there's 550 people, who want seats and but across the various airlines, there's only 500 seats.
That's kind of how Europe is kind of out in North America is so if someone's gonna be discount offering you know Freddie laker's out there selling seats at a real discount it doesn't matter. If it's ready you can fill up as airplane.
You can't like lease the new plan its not like the airline business our business and then what's left is left it is just the fact I think it's also important to note like I don't think our prices or the industry prices are that high people are like getting to a return on capital pricing. This is where pricing needs to be this is why that plant.
Those did in North America in my opinion. This is why this company closed embeds what in 2016 when I joined this company in 2018 and I did my first round out there with customers I got people give me a very harsh words that Orion had close at this plant in France two years ago.
Right, but why I mean, it is because the pricing was too low and people were buying from Russia. So we're just kind of like getting back to a balanced place in my view I don't think it is.
Strong nearly high or anything else yeah. It should change, but that's the change you need if you want to have reliable supply and plants to get invested and maintain.
What's happening is it's a reset to normality.
Hmm mm.
I guess finally kick in.
Can you talk about the trends and specialty pricing.
And you know.
Where they're going or are they moving lower or are they moving higher.
And what.
What the future of those returns says.
So we work hard for our end markets too.
To have a value proposition in those places and yet prices can move up and down with different impacts energy amongst them, but.
We're not looking to fundamentally Oh, what we get in coatings is a high enough return for US I think our view is that our position is we're.
Yes.
Looking at this time when demand is soft.
Not to chase volume by lowering price.
Then when the market turns and the volume comes back to like your business is damage does not as good as it once was our view is we're providing value we're providing a solution to our customers that we should maintain the let's say unit price in that space.
You are still going to see fluctuation in our overall GP per ton on mix.
Things like power, but you know our.
Our view is easy the value of this product is not diminished just because demand is a little slow right now.
Okay, great. Thank you so much.
Yeah.
Question is a follow up from John Kim Jin sang C. J S Securities. Please go ahead.
Hi, Yes, I was just wondering if you could.
I'll give a little bit more color on your plans for the buyback I think you said youre going to be a little bit more measured aggressive.
Compared to the $50 million that you already spent but.
You know if share prices go lower I mean, how does that rank compared to the other.
Uses of cash that you are considering whether its debt pay down or investments and I see you took down your capex as well.
Sure. Joe This is Jeff I mean, if you think about our buyback our first $50 million buyback.
We bought back shares at approximately $10 million for months to get that 50 million by mid May.
And then since our since mid May we took that pace down a little bit.
But to your point, we are we are looking at this opportunistically I think it is probably fair to assume.
That would be a little more aggressive if prices were a little lower and the less aggressive if prices were higher so it's not a it's not a static model.
It is our thought process is a very dynamic there and we will be more aggressive if the prices are perhaps a little bit lower.
Great. Thank you.
Okay.
Okay.
There are no further.
Good questions.
Sure.
Back over to Corning painter for closing comments.
Okay I'd like to thank our analysts for your excellent questions and the time today and thank you very much and this is an exciting time for our company and for the industry and we really appreciate our investors continued support we look forward to seeing you very soon and we're gonna be escaping the heat of Houston by coming up for <unk>.
Conferences in New York in September and we welcome other opportunities to meet you or out in the road. This fall. Thanks again have a good day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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