Q3 2024 Orion SA Earnings Call
Greetings and welcome to the Orion third quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded and his family.
Speaker Change: Pleasure to introduce your host Chris Katz, Vice President of Investor Relations. Thank you, Chris you may begin.
Speaker Change: Thank you Devin and good morning, everyone. This is Chris <unk> VP of Investor Relations at Orion Welcome to our conference call to discuss third quarter 2024 results joining our call today, our accordion feature Orion's, Chief Executive Officer, and Jeff <unk>, Our Chief Financial Officer, we issued our Q.
Speaker Change: Earnings results after the market closed yesterday, we have posted a slide presentation to the Investor relations portion of our website, we will be referencing this deck during the call before we begin I'm obligated to remind you that some of the comments made on today's call are forward looking statements. These statements are subject to the risks and uncertainties as described in the Companys filings with.
Speaker Change: The Securities and Exchange Commission and our actual results may differ from those described during the call. In addition, all forward looking statements are made as of today November as 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 the call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the quarterly earnings deck.
Speaker Change: Any non-GAAP that any non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP.
Corning Painter: I'll now turn the call over to Corning painter.
Corning Painter: Good morning, and thank you for taking time to join our call. We genuinely appreciate your interest and we believe there are many positive things to discuss today.
Corning Painter: Our agenda includes my discussion of Q3 results at a high level adjusted guidance and the contributing drivers to the current market backdrop, and then some factors that will contribute to earnings growth next year.
Corning Painter: And we are encouraged about our prospects for 2025.
Corning Painter: I'll also touch upon capital spending free cash flow expectations, and our capital allocation intentions I will then turn the call over to Jeff.
Who will walk you through our third quarter results in more detail, but for some concluding remarks and a Q&A session.
Speaker Change: Starting on slide three of the earnings deck.
Speaker Change: We delivered adjusted EBITDA of $80 million of 7%, a 7% sequential improvement and 4% higher year over year, while pleased with this growth. These metrics do not really put the achievement in the proper context GP per ton is good our production has improved.
Speaker Change: <unk> is good the single biggest thing holding us back is rubber segment demand in the Americas and EMEA.
Speaker Change: The $80 million of EBITDA, we deliver was our second best for any September quarter, just $400000 shy of the best ever performance for Q3, which was in 2022, notably that year benefited from the particularly high cogeneration contribution in Europe when electricity prices.
Speaker Change: Climbed as a result of the war and related energy market uncertainties.
Speaker Change: The third quarter's performance was despite overall company volumes being down a little more than 3% sequentially and 8% year over year, our rubber segment endured 11% lower volumes compared to a year ago.
Speaker Change: That variance alone equates to roughly 20, K T and our additional $8 million to $10 million of EBITDA drag in this year's Q3.
Speaker Change: One further point U S. Tire production is around 20% below what we might consider mid cycle economic conditions like levels back in the 2017 2018 time period.
Speaker Change: Another way, we're delivering close to record results. Despite what we believe is trough demand conditions for the key markets. We address so we feel pretty good about what we achieved in Q3 considering demand.
Speaker Change: A number of factors supported our results, most notably improved costs and productivity. In addition to the contractual price Jeff will get into more detail here later in the call.
Speaker Change: Now why do we feel good about the underlying operating performance this quarter the industrial economy softened as this year has progressed and our customers have signaled a weaker months of December. This is the primary basis for our additional guidance adjustment we conveyed in the earnings release, along with transient head.
Speaker Change: Wins from lower oil prices, which triggered an inventory revaluation impacting the third quarter.
Speaker Change: On slide four of the deck, we share some additional color.
Speaker Change: As we conclude 2024.
Speaker Change: The replacement tire market is the single largest we address and on the passenger car portion of this space sell through units have remained relatively steady miles driven is the ultimate driver here and the miles driven data in western markets has remained stable.
That said and as we have discussed previously tire production in our primary markets has been more challenging lagging sell through for now the.
Speaker Change: The difference here is elevated tire imports this affects our business because carbon black supply change tends to be regional.
Speaker Change: For context in the North American market imported tires has historically comprised in the low.
Speaker Change: To me it 50% of the total tire units sold including passenger car and truck and bus tires and this year the trend has been closer to or even north of 60%.
Speaker Change: We continue to believe this dynamic will normalize over time as the higher value branded tire companies our customers those building their tires locally adjust their marketing strategies to retain market share in cells and shelf space in their channel.
Speaker Change: To better appeal to consumers, who have traded down to lower value tires.
Speaker Change: Well, we're not just hoping this imbalanced normalizes, we can also influence and blunt the impact of these headwinds for your commercial strategy and the outcome of our approach in this year's negotiations is one of the positive expectations. We have for 2025 I'll get to that in a minute.
Trade flows are also affected by government policy and in the case of tires. You may have seen the recent department of Commerce recommendation that anti dumping duties imposed on truck tires imported from Thailand into the U S.
Speaker Change: There are more tires imported from Thailand than any other country.
Speaker Change: Shifting gears a bit we think investors tend to focus more on passenger car market fundamentals than on the trucking industry.
Speaker Change: But volumetric late despite more passenger car tire units.
Speaker Change: Truck and bus segment is just about as large as the passenger car market in terms of our rubber segment demand.
I'm looking at the freight industry fundamental trends activity levels are seemingly off of their bottom following that hosts told that boom bust cycle, but they're hardly robust. So we see inevitable recovery in this key end market as another source of unblock upside to our demand looking forward.
Speaker Change: On slide five I wanted to share some additional industry color and provide some preliminary commentary and how we're thinking about 2020. We're currently finalizing our 2025 budget. So this is top of mind.
Speaker Change: From a global vantage the region's most important to Orion or the Americas and EMEA.
Speaker Change: Across the pond, the eurozone manufacturing PMI has been below 50 for more than two years, despite that carbon black capacity utilization is expected to be snug less next year. This is primarily a function of the Russia, and Belarus bans coupled with a preference for reliable local supply.
Speaker Change: In the Americas, the carbon black demand function has been weaker impacted by elevated tire imports and a weak U S manufacturing sector more generally as reflected in the U S. P. S.
On the supply side of things, we believe the carbon black industries effective capacity has been cracked over a number of years because of structural factors. There are several reasons for this and we highlight just one in particular, the unintended consequences associated with the air emission control.
Speaker Change: <unk> in the U S and soon in Canada.
Speaker Change: Beyond the competitor's plant closure last year in lieu of upgrades operating production facilities that have abatement equipment is simply more challenging there is ample anecdotal evidence this complexity results in more industry down.
Speaker Change: With this effect and for other reasons, we believe the industry's effective capacity has been reduced by at least 100 to 200 basis points over the last five years.
Speaker Change: There is still at least one U S carbon black production facility that has not yet met is EPA emission standards deadline.
Speaker Change: Existing Canadian plants will now have to make similar investments within a few years as that country is harmonizing its emission standards with the U S. EPA.
Speaker Change: We however, do not have any production capacity.
This will not be a capex burden.
Speaker Change: These dynamics are worth mentioning because while current domestic utilization rates are subdued we believe supply demand in North America will become tight as the industrial economy entire production recover and as tire markets onshore more production.
Speaker Change: Meanwhile, there simply has not been an incentive for investment and expanding north American carbon black capacity and it's difficult to imagine any conventional greenfield or brownfield projects emerging to affect this inevitability.
Speaker Change: Okay whenever you're going to ask so let's talk about the annual global tire contract negotiations.
Speaker Change: Theres a small number of mandates that are not quite finalized, but we are very close to being complete. This seasons can take cadence for our negotiations were more accelerated than normal consistent with our commercial approach this year we.
Speaker Change: We feel really good about the outcome based on commitments already in place from customers, we anticipate volume growth in 2025, even if overall markets. We address are flat.
Speaker Change: We're not going to discuss pricing pricing given the commercial sensitivity in that some negotiations are still happening, but based on the aggregate outcome as of today, we expect our rubber segment gross profit per ton will be comparable to 2024 levels should the economy strengthen as leading tire makers adjust their marketing.
Speaker Change: Strategies and or if the tier import pressures abate potentially aided by tariffs shipping rates or other dynamics, there would be an upside.
Speaker Change: Let's shift to our specialty business.
Similar to rubber we're encouraged about prospects for 2025 Debottlenecking efforts related to some coatings grades where we have been constrained are largely complete so that should translate into a positive next year as should our plant in one bag.
Some of our capacity can serve both specialty and rubber segments. So it was one market strengthens it tightens the other market as well, but another way our specialty and rubber commercial teams are effectively competing for reactor time within our production network.
Speaker Change: <unk> return on assets.
for Enhancing Return on Assets.
Speaker Change: All things considered in specialty, looking to 2025, we're expecting volume improvement in our broader portfolio, favorable pricing and mix, productivity, and a positive contribution from the YBA plan to more than offset cost inflation, resulting in segment earnings growth next year.
Thank you for joining us this year.
Just a couple of additional points on the slide.
Speaker Change: We already mentioned the countervailing duties that the Department of Commerce is marching towards in the truck tire market.
Speaker Change: Any additional tariffs, should they emerge, as an outcome of the U.S. presidential election
would likely be supportive for our business.
both from reduced tire imports and higher domestic freight traffic.
Speaker Change: We continue to see improving plant reliability through maintenance as latent earnings power for Orion.
Speaker Change: We think customers are looking to improve their supply chain resilience and our investments in maintenance and reliability, despite that we have more to do, were part of the motivation for customers to give us additional mandates next year.
Moving to slide 6, I want to discuss capital allocation.
Speaker Change: We have not finalized our entire budget for next year, but we can comfortably say our capex is expected to be down about $30 million in 2025, with spending allocated almost exclusively to maintenance projects and finishing our specialty acetylene black project in La Porte, Texas.
Speaker Change: In 2026, investors should expect another $50-$60 million decline in capital spending.
Speaker Change: Outside of a couple of additional de-bottle necking projects focused on specialty grades, we have sufficient aggregate capacity in place and our focus will be to drive better returns from these assets, not growth investments.
Speaker Change: With EBITDA likely to be higher next year and with CapEx declining, our free cash flow is poised to improve sharply.
Speaker Change: While our leverage ratio needs to come down a bit from the anticipated year-end levels of around 2.8 times to again reach our 2 to 2.5 times target range, we anticipate excess capital over the next two years being returned to shareholders.
Speaker Change: Just this quarter, we bought back $11 million worth of stock, or just more than 1% of our shares outstanding. And 5.4 million shares remain outstanding in our current authorization through mid-2027.
Speaker Change: I will now hand the call over to our CFO, Jeff Glajch, to discuss third quarter results. Jeff?
Jeff Glajch: Thank you, Corning. On slide 7, Orion generated $80 million of adjusted EBITDA during the quarter, an improvement of 4% year-over-year and 7% sequentially, despite 8% and 3% lower volumes respectively.
Jeff Glajch: Our 6% year-over-year gross profit per ton improvement was partly from the favorable 2024 contractual pricing within our rubber segment, but also a function of better absorption variances and positive regional mix within our specialty segment.
Jeff Glajch: The year-over-year EBITDA improvement was driven by better contractual pricing despite weaker rubber segment volumes.
Jeff Glajch: Our adjusted net income and diluted EPS respectively increased 12% and 14% on a sequential basis outpacing the adjusted EBITDA improvement thanks to a more favorable tax rate which was related to jurisdictional mix.
Jeff Glajch: On slide 8, we show the company's year-over-year adjusted EBITDA bridge. As you can see, CoGen no longer represents a challenging comp from the prior year period since power prices have stabilized.
Jeff Glajch: The price mix component on the bridge is primarily the year-over-year benefit from the 2020 full rubber contract agreements.
Jeff Glajch: In the cost and others bucket, better absorption, variances, and certain timing benefits roughly offset other costs including inflation and a transient drag from the inventory revaluation which was related to the recent decline in oil prices.
Jeff Glajch: On slide nine, looking at the rubber segment's performance, the main story here is our improved profitability metrics both on a year-over-year basis and sequentially, despite the absence of stronger volumes.
Jeff Glajch: Even though it was up 3% compared with last year and 12% sequentially, despite rubber volumes declining 11% year-over-year and 3% sequentially.
Speaker Change: As Corning described, our tire customers simply have not taken as much tonnage as they anticipated coming into the year.
Notably, the demands office is more
Speaker Change: Despite these volumetrics, but encouragingly, our GP per ton improved 11% compared with last year's third quarter and 4% sequentially.
Speaker Change: Similarly, adjusted epithelial tongue was up nearly 16% both year-over-year and sequentially.
Speaker Change: The primary reasons for this improved profit metric are better absorption, our inventory levels were below safety stock on many grades, so we purposely built inventory.
Speaker Change: As well, our manufacturing plants ran more smoothly in the quarter. As a result, we had less planned and unplanned downtime.
Thank you.
Speaker Change: On slide 10, we show the year-over-year adjustability for drivers for the rubber segment. As you can see, favorable pricing didn't quite offset the impact of lower volumes.
Speaker Change: But our cost performance helped, a function of better fixed cost absorption I just mentioned on the previous slide and as did some timing considerations.
Speaker Change: These were partially offset by inventory revaluation associated with lower oil prices and Cogen's lower contribution owing to the previously discussed outages that persisted in Q3.
On slide 11 is the overview of our specialty segment.
Speaker Change: Volume in this year's third quarter were flat against last year's Q3 when volumes had peaked Q3, I'm sorry, where volumes had increased nearly 15% versus the previous year.
Speaker Change: Constructively, Mix was favorable in the quarter with a decline in volumes in some lower value markets being more than compensated for with sales into high margin applications including coatings and printing inks.
Speaker Change: Geographical mix was also favorable with the Americas and EMEA improvement offsetting Asian trends with demand was soft.
Speaker Change: It is noteworthy that if not for the inventory revaluation on lower oil prices, GP per ton would have been closer to $6.50.
Speaker Change: Slide 10, sorry, slide 12 depicts year-over-year adjusted even the bridge for specialty.
Speaker Change: While we mentioned segment volumes were flat, the regional mix was favorable, and for our business, that is captured in the volume comparison.
Speaker Change: This was a function of improvement in Europe where we tend to manufacture our most specialized grades, serving more differentiated applications, and some moderating demand in lower value applications in Asia and North America.
Speaker Change: Favorable pricing and in-region mix also contributed to adjusted EBITDA growth and these improvements were only partially offset by the transient inventory revaluation, higher inflationary driven personnel costs, and also strategic staffing needed to build up our global conductive carbons and battery team.
Speaker Change: Before discussing free cash flow for the full year on slide 13, I thought this might be a logical time to touch on the fraud that transpired early in the quarter because this impacts our cash flow for the year and our balance sheet methods.
Speaker Change: The Audit Committee of our Board has completed an independent, third-party investigation which confirmed the main facts which we discussed in our 8K filing on August 12th, including no evidence of a cyber intrusion into our IT systems.
Speaker Change: In addition, immediate protective measures were put in place and subsequent remediation and control steps have been added.
Speaker Change: As shown on slide 13, we concluded Q3 with a net debt leverage ratio of three times on a trailing 12-month basis, and this would have been closer to 2.8 times if not for the fraud event.
Speaker Change: Looking at cash flow drivers, we are still expecting CapEx spending to come in at 200 million dollars for the year.
Speaker Change: As discussed previously, total CAPAX is expected to be nearly halved by 2026.
Speaker Change: Due to the lower adjusted EBITDA levels, along with slightly higher working capital needs, we now expect free cash flow will be negative $35 million for 2024 before the impact of the fraud event.
Speaker Change: After adjusting for the tax effect from the fraud loss, negative cash flow, free cash flow may be 75 to 80 million dollars for the year.
Speaker Change: We expect Net Debt to EBITDA to be close to 2.8 by year-end 2024, as the typical Q4 seasonal working capital release occurs.
Speaker Change: Directionally, we expect to achieve our 2 to 2.5 targeted net leverage ratio within the next 12 to 24 months via higher EBITDA generation and free cash flow, even factoring in additional buyback activity.
Speaker Change: I will turn the call back to Corning to touch on our revised guidance and for some concluding remarks.
Corning Painter: Thanks Jeff. Slide 14 depicts Orion's revised guidance for the full year, from which you can infer our fourth quarter adjusted EBITDA expectations are around 70 million dollars, which would be our best fourth quarter ever.
Corning Painter: As discussed, our latest view reflects a cautionary stance for many customers.
Corning Painter: October was a solid month with overall company volumes up modestly both year over year and sequentially, but customers are signaling a more pronounced seasonality this December. All of this said, we have a lot to be encouraged looking into 2025.
Corning Painter: As I said in the beginning of the call, and despite the negativity in our share price, we believe we are driving many positive developments in our business that will translate into higher earnings, returns, and free cash flow.
Corning Painter: Simply lowering capital spending coupled with our business trajectory for 2025 would have a significant impact.
Thank you very much.
Speaker Change: With that, Devin, let's open it up and take some questions.
Devin: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment please while we poll for questions.
Devin: Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.
Yeah, hey guys, good morning.
Devin: I want to ask on the rubber side first, so I guess when you look at volumes today, this quarter, last quarter, and your comments around growth for next year, would you say your volumes are at a trough?
Devin: And can you just square all this with your comments around flat gross profit per ton? Was there some spread or price given up to gain those volumes? Or are we just uncertain on some of the contract outcomes and pricing?
Speaker Change: Well, let me clarify. We're well along the way. They're not completely complete, and I think it's inappropriate to say too much about pricing. What we wanted to convey there
Speaker Change: is that we've had a very positive negotiating cycle and one that we can build on for 2025. I feel like sometimes there is negativity around the increase this industry has achieved in terms of pricing and is that all going to be given up? And my point on that is not so.
Speaker Change: We do see some mixed change in terms of who our customers are, that's part of our strategy. We think that makes us less vulnerable to, let's say, a consumer sell-down a little bit.
and I think in terms of
Speaker Change: when we say that it's a trough, just looking at how high imports are right now.
Speaker Change: the ongoing effort of the global companies to retain their market share coupled with the current regime in the United States in putting these tariffs or these duties in response to anti-dumping charges and then the likelihood of that going forward. I mean, I think you put all those things together and it just sets up a pretty positive outlook for next year.
Thank you for watching!
Thank you for watching!
Speaker Change: Okay, I guess just to follow up another time on the contract side or at least on the gross profit per ton side of things, I guess I just want to understand is
Speaker Change: Is that a conservative base that we should be thinking about in that we're not losing price, volumes gain, and there could be upside with favorable contract negotiations, or is that already baked into that assumption? Some changes there may be offset by mix. Just not sure how conservative or not that expectation is.
Speaker Change: Yeah, so I remember a couple years ago we indicated, wow, you know, earth-shattering change in the pricing negotiations. I would put these as positive, continuing to move us forward. I would not be looking at a repeat of what we achieved a couple years ago.
Speaker Change: and recognize, you know, we're in the supply-demand section, segment that we are. Also that we've potentially, you know, adjusted sort of where we're playing in terms of the customer mix.
in the industry space.
Speaker Change: But all in all, and it's also like they're not completely done, Josh, so it's just, it's awkward to talk too much about exactly where things are coming in, but we're well on our way. We're ahead of schedule. That was our strategy and our approach for this year. We think that's worked well for us and we'll give our real guidance when we do our Q4 results.
Speaker Change: Understood. And I guess just on specialty, I mean I think your framing of favorable markets for continued volume growth
Speaker Change: Not many companies have been talking about coatings markets and plastics markets as favorable near-term So how much of that is a comment of I guess you have Huawei ramping and you had some cost issues this year versus you're actually seeing growth in your end markets at this point in time?
Speaker Change: Yeah, we would see a couple of positives. Number one would be the debonairking demand in the specialties. I'd say a long-term driver, you see this move to get rid of lead piping in the United States, which I think would be maintained in future administrations. That's a real infrastructure, you know, piping for the water systems, that sort of thing. So I think you can point to some specific drivers there and just a general sense of what's manufacturing momentum.
For more information visit www.corningpainter.com
Okay, thanks. I'll turn it over.
Speaker Change: Thank you. Our next question comes from the line of Lawrence Alexander with Jeffries. Please proceed with your question.
Speaker Change: Can you give your perspective on the Outlook for Capacity Edition, either new plants or
Speaker Change: keep bottlenecking like just the rate of capacity additions by region.
Speaker Change: over say the next 3-5 years. To what extent is there evidence that we're getting near or at the level of reinvestment economics, at least in some regions?
Hi Lawrence, thanks for the question.
Speaker Change: I think that, you know, it's not just economics, it's also the risk, it's the uncertainty in the markets and all of that. So I think the only thing we're going to see in the United States or North America, I'd say, would be people like ourselves who invest in maintenance and reliability and we could gain, I don't know, half a point to a point a year of capacity just by better ability to run the plants.
Speaker Change: and I say I see something similar in Europe. I mean it's just a lot of uncertainties with how the war is going to end. There are other exports into the marketplace and so forth.
Speaker Change: I don't think, we saw the Indian market expand, they kind of have been saved by the war in the European theater, which now gives them an export market. I would think they would be cautious right now about their desire to expand.
Speaker Change: And then in China, okay, sometimes people look at that market differently, but I don't think the current Chinese economy is...
Speaker Change: is really conducive to people expanding capacity there. So, I really don't think there's a big incentive...
Speaker Change: for a new brownfield line or a new greenfield line in the rubber carbon black space. I think all the sustainability stuff is...
Speaker Change: and that question mark as well. As you well know, right, you've got this question with monoliths and pyrolysis in the U.S. So all those just add uncertainty, which I think discourage investment.
Speaker Change: And then on the specialty side, I mean, to the extent that you are...
Speaker Change: You know, you're flagging already kind of a saltish December. To what extent is that just, you know, typical, you know, winter, you know, the last couple of years we've seen the kind of end-of-year destock. Is it just that or are you seeing people say, well, we don't really know the trade dynamics?
Speaker Change: You know what policy will be in you know, it's going to be a bit of a information gap for six months Let's pause on capex pause on you know, new product launches. I mean to what extent are you seeing like a broader pause? from customers
Speaker Change: yeah I would say we customers have expressed to us even before the election that they just plan to take longer holiday outings outages in December you know you shut down the whole factory there's certain economies that go with that and that's not just
Speaker Change: That's rubber as well. So I saw that really as a year-end thinking about what inventory levels they wanted more than a 2025 picture.
For more information visit www.corningpainter.com
Okay, great. Thanks.
Thank you, Lawrence.
Speaker Change: Thank you. Our next question comes from the line of John Roberts with Mizzou Host Securities. Please proceed with your question.
Speaker Change: Thank you. In especially blacks, you mentioned regional mix effects. Could you elaborate on that? I think of the rubber black being business being regional, but specialties I think of being more global and more product mix effects.
Speaker Change: John, that's a that's an excellent question and you're right it is a more global market but profitability in different markets can vary, right? So I would say in general let's say profitability in Europe is higher on a per ton basis than in Asia.
Speaker Change: So kind of what we're signaling there was just more strength in Europe, North America in that time period versus Asia. And we don't put that in the mix line the way we show it, that's really more in the volume so we call it out.
Speaker Change: And is Europe more profitable? I mean we know very few companies have more profitable European businesses than other regions. Is that the mix in Europe is more coatings and inks and less, you know, plastic master batch and so forth?
Speaker Change: I would say I think many a chemical company would tell you that okay you've got the whole volume effect
Speaker Change: But for like-for-like product profitability, it often is a little more challenged in Asia than it is, let's say, in Europe or North America. And that's really what we're referring to.
Speaker Change: Okay and then secondly Trump has said he's going to end the Ukraine war and Putin I guess has already called him and said he's ready to talk it's there how do you see Russia normalizing or you know if we go beyond 2025?
Speaker Change: Right, so let's say there's peace tomorrow, which let's all be clear, right, would be a good thing for humanity. I think that Russia, Belarus, Ukraine, they used to do well over a third of the carbon black into Europe.
Speaker Change: Some tire companies bought as much as 50% of their carbon black from the Russians.
Speaker Change: I don't ever see that going back. I don't think anybody's going to want 50% of their supply chain coming out of Russia going forward, no matter what the price is. Now, Russia was largely replaced by imports primarily from India, but also some from China, as well as all the rest of us ramping up a bit.
Speaker Change: What I think we see in a situation where Russia was, let's say, politically rehabilitated and came back, and I think that would take a little time, is that would just simply adjust the base, where the imports are coming from.
and that's how I would look at that going forward.
Speaker Change: Okay, so you think operating rates in Europe would be relatively unaffected then, maybe just to summarize that?
Speaker Change: Yeah I think that anybody who's got a plan in Europe I think is still going to be in a very good position to keep them running. I think that's the rule, the learning of the last four or five years and I think that will remain true.
Speaker Change: Okay, thank you. And I think, like, another thing, like, you currently see Russian product going to China, China project going to Europe. Like, you can also just see supply chains potentially straighten out a little bit.
Thank you.
Speaker Change: Thank you. Our next question comes from the line of Jeff Zekakis with JPMorgan. Please proceed with your question.
Thanks very much.
in a world of higher tariffs.
for
Speaker Change: China and other Asian countries in the event that that occurs.
Is that good or bad for you?
Speaker Change: So for Orion specifically, our view is higher tariffs would be good for us. We have mainly local production. Our customers are impacted by imports as we talked about. A situation where there's more manufacturing locally for the local markets in general is going to be a big plus for us.
You were talking about the Thai anti-dumping.
investigations.
I think that there have been final determinations.
Speaker Change: So do you see that as altering the truck market and truck tire market in particular ways?
Speaker Change: Well, so, you know, Thailand's not the only country that exports to the United States, but I think incrementally or sequentially each one of these is a step in that direction. Could I tell you we've seen that impact and we can point to it exactly in our volumes at this point? No, of course not, right? That'll take a couple months to work through the system. But I would just say it's one of the factors.
Speaker Change: that should get us back to more traditional levels of imports.
Beyond that, right, there's also the local manufacturers.
Speaker Change: just adjusting where they're positioning themselves within the top tier market in terms of a value proposition that's gonna be more appealing to customers. So, you know, a 40,000 mile hire instead of pushing 60,000 mile hires as an example.
Speaker Change: I think it's there's just a number of factors that's going to get that to revert to the norm and we see that as an upside for us. Although that's not what our assumptions necessarily are going to be for next year, we'll wait and see between now and then when we do our guidance.
So, you've spoken about being encouraged in your pricing negotiations.
Speaker Change: So, in the United States, for the last two years, tire production has been...
down.
Where's the positive leverage that the carbon black
That is, as demand continues to fall...
Um...
Speaker Change: You know, why isn't it in the natural course of events that prices fall?
Speaker Change: Why do they hold or go up? What keeps them up?
Speaker Change: So, the positive factors out there are, of course, you've been talking and we've seen the trend of the last couple of years.
but we're negotiating, of course, for 2025.
Speaker Change: Right, and there's a difference right there. A positive factor for us is, if we think on a global basis,
Speaker Change: People who have been relying on imported carbon black in Europe haven't always necessarily liked it.
Speaker Change: Right? So that's an advantage for us in the European market. In the South American market, it would be supply chain reliability, I'd say, is a big part of the driver in terms of what people are thinking of. And then finally, we changed our commercial strategy a little bit this year to reflect a little bit the shifts of different companies and also just trying to move this thing through more quickly. And I think that was also a positive for us. So that's how I would frame it.
Okay, great. Thank you very much.
Speaker Change: Yeah, maybe, you know, if you're going to say one more thing, Josh, you continue to look at Josh, sorry, Jeff, you continue to look forward to the future.
I mean, we continue to have...
Speaker Change: expansions in North America and Europe without really carbon black expansions.
Speaker Change: And so that doesn't really answer the question for 2025. However, there is some ramp at some of the newer sites for next year. And I think that's just like an overall, you know, reminder in the back of the mind of every negotiator is they're thinking about how they position themselves, you know, not just for one year, but longer term, who they're sort of paired up with.
Speaker Change: So I think that's a little bit of a positive as well.
Thank you so much.
Thanks, Jeff.
Speaker Change: Thank you. Our next question comes from the line of John Tan-Wan Tang with S...
with CJS Securities. Please proceed with your question.
Speaker Change: Hi, good morning guys. Thank you for taking my questions. I was wondering, what kind of volumes do you think would come back to you and the industry, you know, with the tariffs?
Speaker Change: coming in line. Maybe there's some more, maybe there aren't, but from that factor alone, assuming just demand was flat, is there an expectation of how much the importers might exit the market or how much you might be able to regain just in terms of share?
on volume.
Speaker Change: Well, I mean, I think if we got tire imports just back to where they've traditionally been in the low 50s.
Speaker Change: with a Miles Driven today, and if that was coupled with, we saw manufacturing picking up, right, because it wouldn't just be Tariffs on tires. So you'd see truck traffic picking up. You'd be back to volumes like 2017, 2018, 2019. We would be heavily loaded and we'd be at, you know, significantly improved EBITDA from where we are. So I don't think it requires a lot to really get there. And again, let me stress, I don't think the story here is just one about Tariffs. I think the tire manufacturers are moving and working in this direction as well. We all have the same desired outcome in that regard. But clearly, I think you just need to get back to where you were in the late teens.
Speaker Change: Okay, got it. And then, Jeff, just a quick question. What's driving the increased working capital this year? My assumption with lower crude prices, that might actually be a tailwind for you. I'm wondering what happened and maybe I missed it earlier.
Jeff Glajch: We've built some inventory, particularly in the third quarter, as we mentioned on the call, and so that's a big step. I think as we go into Q4, as I noted, we expect to see, as we see some seasonal impacts, perhaps we'll see inventory come down a little bit, but we'll also see receivables come down and just see working capital. While it will be up year over year, it will be down from where it is right now.
Jeff Glajch: And on inventory, I'd just like to stress, because we got some questions last time, we're not talking huge movements in inventory, but we've had certain grades at certain locations where we're below our target inventory levels, and really we've just been looking to recover that, and then there's some places where we'll have a step change come January, and so getting ready for that as well.
Speaker Change: Okay, would you expect a reversal in, excuse me, entering 25 or is that kind of mostly going to be a
of Fluttershy.
Speaker Change: I wouldn't see a reversal I mean what you would expect in Q1 to have higher commercial activity so let's say just the customer portion of that would go up a little bit in Q1. Yeah I think if you look across what we're looking at 2025 is you will see
Speaker Change: quarterly swings but across the year we don't see a dramatic change in working capital for 25. But you will see a step up in Q1 as we usually see in the first half of the year and then kind of works its way down through the second half of the year.
Speaker Change: Got it. Thanks. And then, Corning, sorry, just one more, if I could sneak one in. To go back to the import question, do you see the industry, you know, building inventories before tariffs are put in place and then maybe some, you know, higher inventory entry in the new year or before that that needs to be burned off impacting you?
Corning Painter: Right, so let's first clarify what we mean by industry. There's very, very, very little carbon black imported into the United States, so I don't see any impact on it around that. We're then talking about the tire market.
Speaker Change: You might recall, last quarter, one of the tire companies speculated that some of the step-up in imports was just that, people trying to move products before the tariffs hit. I think it's quite likely you could see an intermittent kind of blip on imports if there's a deadline of when they're going to be inputting.
I think that could well happen.
Speaker Change: But, you know, nothing, you know, all this is speculation based on the election. I want to be clear, like, tariffs is true. It's a net positive for us, it's a net positive for this industry, they would be good.
We can do good things.
Speaker Change: without the tariffs and I just like to make that clear.
Got it, thank you.
Speaker Change: Thank you. Our next question is a follow-up question from the line of Josh Spector. Please proceed with your question.
Speaker Change: Yeah, hi guys. Just a quick one. I just wanted to ask specifically on Wabay, just given some of the shutdown impacts and the requalification impacts in this year, how much of a drag has that been in 24? And I guess should we be thinking about that as a benefit to 25? I'm not thinking about the volume side of it, more just what's in your control on costs.
Speaker Change: Sure, I would say you would expect that to be, I don't know, low single to mid digits impact for this year and I would expect a minimum of like 10 million swing as we move to next year.
Speaker Change: Can you explain that last point? So a 10 million swing even though a low single to mid single-digit impact, does that assume that you sell out some of those volumes or is that just... Yeah, I'm sorry, my positive swing would not just be cost-related because we'd have, you know, the plant operating team cost, that kind of thing. The positive swing would be including the loading as we reload that plant next year.
Thank you.
Jeff Glajch: Okay, got it, thank you. Jeff, this is Jeff. Just to clarify a little further, we have talked that we feel over time that there's probably about a 20 million dollar benefit to Hawaii Bay from where we are in 2024 to where we think we can be going forward. We think, as Corning said, roughly half of that we think we see in 2025 and then I think the rest of it you could assume would be probably in 2026. Yeah.
Okay, thank you.
Speaker Change: Thank you. There are no further questions at this time. I'd like to turn the floor back over to Mr. Painter for closing remarks.
Corning Painter: Okay, thank you again for joining us. As you can tell, we're very confident about our direction and our ability to significantly step up our free cash flow. We appreciate your interest and look forward to more detailed discussions with analysts and investors following this call today and early next week. On the calendar, we'll be at the Bayer Conference in Chicago next week and in MDR the following week in the Boston area. We look forward to seeing many of you. Have a nice day.
Corning Painter: [music].