Q4 2024 Orion SA Earnings Call
Speaker Change: Greetings and welcome to Orion SA fourth quarter and full year 2024 earnings conference call.
Speaker Change: 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.
Speaker Change: It is now my pleasure to introduce Mr. Chris Kapsch, Vice President of Investor Relations. Thank you. You may begin.
Speaker Change: Thank you, Julian. Good morning, everyone. This is Chris Kapsch, VP of Investment Relations at Orion. Welcome to our conference call to discuss fourth quarter and full year 2024 earnings results as well as our initial outlook for 2025.
Speaker Change: Joining our call today are Corning Painter, Orion's Chief Executive Officer, and Jeff Glajch, our Chief Financial Officer.
Speaker Change: We issued our fourth quarter earnings release after the market closed yesterday. We have posted the slide presentation to the investor relations portion of our website. We'll be referencing this deck during the call.
Speaker Change: Before we begin, I am obligated to remind you of some of the comments made on today's call are forward-looking statements. These statements are subject to the rights and uncertainties as described in the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during the call.
Speaker Change: In addition, all forward-looking statements are made as of today, February 20, 2025. The company is not obligated to update any forward-looking statements based on new circumstances or revised expectations.
Speaker Change: All non-GAAP financial measures described during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the earnings debt.
Speaker Change: All non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP.
Speaker Change: With that, I will now turn the call over to Corning Painter.
Corning Painter: Good morning, and thank you for your interest in Orion and for joining our call.
Corning Painter: Since we issued a preliminary update on year-end results last month, I'll just touch upon 2024 from a high level and jump into how we see the market evolve.
Corning Painter: Then, I'll discuss how we intend to navigate these dynamic times to drive results, unlock the Orion's inherently greater value, and improve shareholder returns.
Speaker Change: After that I'll turn the call over to our CFO Jeff Glajch to review Q4 and year-end results and to discuss the sharp improvement in free cash flow that we see in 2025 and into 2026 and beyond.
Speaker Change: If there was just one takeaway from today's call, it would be just that. The free cash flow inflection is at hand.
Speaker Change: On slide 3, despite the late Q4 demand weakness in our rubber segment, we finished 2024 with EBITDA just north of $300 million.
Speaker Change: True. We expected it to achieve higher levels at last year's onset.
Speaker Change: But the $302 million that we did achieve in 2024 is still 14% above pre-COVID earnings levels.
Speaker Change: despite a demonstrably softened global industrial backdrop underscored by nearly two and a half years of PMI contraction in both North America and Europe.
Speaker Change: and, despite a rubber demand being further undermined by distorted global tire trade flows, which we've discussed in prior calls.
Speaker Change: With consumers still trading down, elevated levels of low-value tire imports persisted through the end of the year. This, in turn, weighed on local tire production in the geographies most important to us.
Speaker Change: On this slide we mention mid-cycle volume. The metric simply represents some rough normalization math that could be expected from a stronger demand backdrop, including a return to historic levels of tire imports.
Speaker Change: applying about a hundred million dollars of EBITDA upside based on current incrementals and without additional contribution from our newer plants in China or Texas.
Speaker Change: and other margin improvements in our specialty business, which we'll discuss a bit later in the call.
Speaker Change: Considering the demand headwinds, we are proud of surpassing the 300 million EBITDA mark for the third consecutive year and believe this achievement and Orion's resilience more generally showcases the durable nature of our business.
Our products are essential.
Speaker Change: The razor blade characteristic of the replacement tire market helps blunt cyclicality.
Speaker Change: and the structural pricing gains that we have achieved, and frankly that we deserve, have remained intact.
The economic backdrop is uncertain.
Speaker Change: and has several headwinds to be sure. But the central one for us in 2024 was soft rubber segment demand. This has been partly attributable to mixed consumer confidence, at best, as well as lingering inflationary pressures.
Speaker Change: We believe these dynamics led to customers treating down in the tires, which in turn impacted our markets.
especially passenger car tire markets in our key marketplaces.
Speaker Change: There is also pressure on truck and bus tire production, including the underlying freight market, which has remained subdued, another headwind for our rubber segment.
Speaker Change: Our forecasts are developed bottoms-up from what our key customers are telling us.
Speaker Change: And clearly, they did not envision 2024 playing out the way it did, with consumers trading down from their premium offerings, often to lower-value imported brands.
Speaker Change: If there is a silver lining here, it would be that the inferior quality imported tires simply do not last as long as the premium brands, and so this shift should represent latent demand for the tire industry's replacement cycle.
Speaker Change: Still on slide three, another important business characteristic to showcase is our substantial progress regarding sustainability.
Speaker Change: We are a leading innovator in the global carbon black space.
Speaker Change: And driving circularity is a part of our long-term strategy. We see a business opportunity here because our customers are asking for solutions to help them meet their OEM customers' circular expectations.
Speaker Change: In 2024, we achieved Ecovidesis Platinum rating, positioning Orion in the 99th percentile for companies assessed by this PRIM and Sustainability Rating Agency.
Speaker Change: We are a leader in the carbon black industry for the production sites with ISCC plus certifications.
Speaker Change: We achieved the second highest level in CDP's climate change and water security evaluation, a recognition of our sustainability efforts.
Speaker Change: And, not only was Orion the first company to manufacture a circular carbon black from 100% tire pyrolysis oil, or TPO, but we are scaling our TPO processing capabilities currently.
Speaker Change: We have other innovations in our sustainability pipeline focused on cost-effective solutions and continue to believe these efforts will translate to competitive advantage over time.
Slide 4 touches upon the backdrop thus far into 2025.
Speaker Change: We wish we could point to green shoots, but I would characterize our markets more as sideways at this juncture.
Speaker Change: Global auto bills are generally expected to be flattish and passenger card
tire replacement demand has remained relatively stable.
but elevated tire imports.
continue to pressure local production.
Speaker Change: Just one data point. As an example, according to U.S. trade statistics, domestic tire production was 15% lower
Speaker Change: than year-ago levers in December alone despite tire shipments being slightly higher year-over-year in the same month.
Speaker Change: The freight industry's indicators also remain subdued, with tender volumes remaining slightly lower year over year, despite some modest prior year comparisons.
are the modest prior year comparison.
Speaker Change: However, the most recent leading indicators for the trucking industry reflect a stronger sentiment implying potential improvement in the shipping industry fundamentals.
Speaker Change: On the geopolitical front, we believe tariffs would be beneficial to Orion in particular.
Speaker Change: We have no unique insights into how the new administration's trade policies may play out.
Speaker Change: So the timing and magnitude of tangible benefits remains an uncertainty.
At least for now.
Speaker Change: We've been asked about the conflict in Europe and what a conclusion to that war represents for Orion's fundamentals in the region. Let me be clear here. We believe peace would be a good thing, bigger than any company's quarterly result.
Speaker Change: Back then, ending the war would likely lead to a sharp improvement in European consumer confidence and a reduction in inflation. This would be good for us.
Speaker Change: Meanwhile, it's not clear when or if sanctioned Russian carbon black product would return to Europe.
Speaker Change: Even if EU countries unanimously agree to lift the sanctions in a post-war scenario, as unlikely as it seems, it's also difficult to imagine many customers viewing this potential source of supply as dependable or getting anywhere near the prior usage levels.
Even if they somehow get comfortable with the social aspect.
Speaker Change: In any case, we believe imports from Russia would largely displace imports from India and China.
Speaker Change: Shifting Gears. Our specialty segment exhibited a strong volume recovery in 2024 with full-year volumes advancing 11%.
This improvement was skewed towards lower value products.
Speaker Change: But we are expecting higher margin grades to do disproportionately better in 2025, thanks largely to the completion of targeted e-bottlenecking projects.
Moving to slide five.
Speaker Change: We have leaned into the factors we can control which should contribute to higher earnings this year.
Speaker Change: As previously conveyed, and as an outcome of our commercial strategy enacted last year, we earned additional mandates in our rubber segment for 2025, which will help diminish our over-indexing to top-tier brands most hurt by the elevated tire imports.
Speaker Change: We executed a non-labor workforce reduction, which is nearly complete, and savings will help mitigate inflation.
Speaker Change: We fully expect to have the operational challenges in China behind us in 2025, and have been successfully running both production lines at our Huibei plant in recent months, even as the premium grade re-qualifications continue.
Speaker Change: Another theme you should expect to hear more about in 2025 is the multi-year recovery happening within our specialty segment.
Speaker Change: There are many elements contributing here, but in addition to the expected mixed improvement that I previously mentioned, there are other levers, including promising yield products as well as more optimal capacity allocation strategies.
Speaker Change: This is intended to support both new specialty and market growth factors and higher margin products more generally.
Speaker Change: Speaking of higher growth factors, our conductives portfolio is a prime example.
Speaker Change: Even with the slower electric vehicle adoption globally, the battery market still represents one of the fastest growing markets our business touches.
Speaker Change: But considering the slower EV growth rates, we've expanded our commercial scope and resource efforts to reach a much broader mix of end customers for our unique conductive carbons.
Speaker Change: We are actively onboarding new customers, and are particularly encouraged about the ongoing qualifications in the broader energy storage space, as well as the high-voltage wire and cable market.
Speaker Change: You should also hear more about our Operational Excellence Programs in 2025 as they build momentum internally at Orion. The ultimate goal here is enhancing our plant reliability, which will in turn show up in our P&L.
Speaker Change: On slide 6, at an even higher level, we see certain megatrends as beneficial to our business fundamentals. Perhaps most notable is the global trend towards reassuring of manufacturing activity, both in the tire industry, but in general industrial production more broadly.
Speaker Change: Within the tire industry alone, based on public disclosures, there are four times as many public announcements highlighting recent or on-growing investments in greenfield capacity or brownfield tire expansions in North America as there are rationalizations.
Speaker Change: While some small tire plants have closed, these tend to be consolidation efforts, where production is expected to be moved to more modernized tire manufacturing plants.
There's a similar trend in Europe, although not as pronounced.
Speaker Change: This reshoring activity parallels the ongoing trend favoring more localized supply chains, and our experience is that customers are willing to pay a premium for localized security of supply.
Speaker Change: In terms of value enhancing levers, 2025 should be a pivotal year given our expectations for sharply improving cash flow this year, next year, and beyond.
Speaker Change: We simply do not need as much additional growth capital over the next several years. So our cash flow conversion is poised to improve sharply with capex being reduced significantly.
Speaker Change: As EBITDA growth resumes and as cash flow conversion improves we foresee ample share repurchase capacity.
Speaker Change: Indeed, and as mentioned in our earnings release, we bought back nearly 20 million dollars worth of stock in 2024 since resuming our share purchase activity last August.
Speaker Change: And we have continued to buy back stock in 2025. Jeff will elaborate more on this activity in a few moments.
Slide 7 depicts
Speaker Change: Our updated CapEx intentions for 2025 and 2026, which underpins the improving free cash flow expectations I just emphasized.
Jeff will provide more color here.
Speaker Change: But before turning the call over to Jeff to review our results, let me discuss our newly established guidance for 2025 on slide 8.
Speaker Change: Considering the dollar's strength, which represents an approximately $15 million headwind compared to 2024 results,
Speaker Change: The $310 million adjusted EBITDA midpoint represents about 7-8% constant currency growth.
Speaker Change: Assuming flat markets this year and no benefits from potential tariffs.
at least yet.
We expect Eva Dark Road.
Speaker Change: We'll come from higher rubber volumes, better specialty demand and mix.
Speaker Change: a positive swing in China with the operational issues being resolved.
Speaker Change: a higher co-gen contribution, and a benefit from cost actions more than offsetting adverse effects of inflationary costs.
Speaker Change: Assuming a tax rate of around 30%, we expect our 2025 adjusted EPS to be in the $1.45 to $1.90 range. This guidance range reflects uncertainty given the current macro.
Speaker Change: With anticipated improvements in cash flow conversion, our free cash flow is currently expected in the 40 to 70 million dollar range.
Speaker Change: Later in the presentation, you will see the case for this free cash flow generation to more than double in 2026.
And with that, I'll turn the call over to Jeff.
Thank you, Corning.
Speaker Change: Slide 9 depicts highlights for our Q4 and 2024 financial results. Notably, while EBITDA was down about 7% year-over-year in the fourth quarter, there were several tax items which benefited adjusted EPS, which was more than double the prior year's EPS.
Speaker Change: The tax items were mainly one time in nature, but not adjusted out based on our long-standing internal policy and for consistency purposes.
Speaker Change: Weaker rubber demand in the quarter contributed to the fourth quarter's event that declined.
Speaker Change: We believe this was primarily tied to pressures our customers were feeling from elevated tire import levels in both North America and Europe, along with their extended holiday shutdowns and inventory adjustments.
Speaker Change: The dollar strengthening midway through the quarter versus the Euro, South Korean Won, and Brazilian Real also impacted our results modestly.
Speaker Change: Finally, we have about 1.4 million dollars of costs in Q4 related to our workforce reduction. These costs were not added back to adjusted metrics.
Speaker Change: A full year basis, in addition to soft rubber demand, adverse cogen comparisons and inflationary costs were contributors to our 9% lower EBITDA.
Speaker Change: The impetus for our commercial strategy to partly diversify away from our premium Tier 1 tire customers was the imported tire impact and consumer trade-down issues which Corning mentioned.
Speaker Change: In addition, these challenges and continued cost pressures were factors in our headcount reduction action, which should result in approximately $5 to $6 million in annualized savings to help offset higher fixed costs and SG&A inflation.
Speaker Change: As a side note, along with the Q4 impact of $1.4 million, we expect to have another $2 million of separation costs related to this initiative, which will occur in Q1 of this year.
Speaker Change: This charge, again, will not be added back to our adjusted EBITDA results.
Speaker Change: Importantly, we are beyond our peak CapEx spending, and generating free cash flow will be a key focus in the foreseeable future.
Speaker Change: Anticipating this free cash flow inflection and considering our stock's valuation, we reinitiated our share repurchase activity last summer.
Speaker Change: In the fourth quarter we bought back about a half a million shares and more than 1.1 million shares since resuming repurchases last August.
Speaker Change: Notably, since instituting our share buyback program a little more than two years ago, we have repurchased around 7% of net shares outstanding.
Speaker Change: So we are not talking about buybacks that merely fund share-based compensation programs as many companies do. We have reduced our absolute share count as of mid-February by 7% in just over two years.
Speaker Change: These buybacks are accretive to EPS and we expect beneficial to our shareholders over time.
Speaker Change: As of December 31st, 2024, we have about 4.9 million shares remaining on our current buyback authorization.
Speaker Change: While we normally do not comment on share repurchases within a quarter, I will note we have continued to opportunistically buy back shares in the current quarter.
Speaker Change: Slide 10 exhibits Orion's full-year performance in 2024 which included flat overall volumes.
Speaker Change: The modest decline in gross profit and EBITDA metrics was attributable to a lower cogent contribution, timing of cost pass-throughs, and higher inflationary-driven SG&A costs.
Speaker Change: Our adjusted net income was down 11% for the year but adjusted EPS was down just 8% thanks to fewer shares outstanding which was attributable to the net buy back activity I just mentioned.
Slide 11 shows the company's fourth quarter KPIs.
Speaker Change: Overall volume and gross profit increased about 1 and 2 percent year over year respectively as the benefit from the contractual base price improvement in a rubber segment was partly offset by lower co-gen contribution and adverse mix and specialty.
Speaker Change: The adjusted EBITDA metric, down 7% year-over-year, was affected by inflationary costs impacting our SG&A.
Speaker Change: Adjusted net income and EPS were up sharply thanks to the several one-time tax items.
Speaker Change: Slide 12 shows the fourth quarter event of bridge on a year-over-year basis with positive pricing more than offset by lower volume and geographic mix, a reduced co-gen contribution, and adverse effects.
Speaker Change: Notably, while aggregate costs look benign in this bridge, there was a divergence in cost variances between rubber and specialty, which I will discuss shortly, with specialty contributing favorably and our rubber segment seeing higher costs.
Speaker Change: Slide 13 portrays the rubber segment results in the fourth quarter.
Speaker Change: Late in the quarter, demand weakness resulted in 2% lower volumes year-over-year.
Speaker Change: The gross profit benefit from contractual-based pricing was more than offset by regional mix, adverse timing on pass-throughs, and lower contribution from COGET.
Speaker Change: An important takeaway from this slide is the resilience and stability in our rubber business.
Speaker Change: as evidenced by the graph illustrating the segment's trailing 12-month gross profit per ton trend, which remains remarkably steady over the past two years at around $400 up from the mid-200s just three years ago.
only partially offsetting the impact of lower volumes.
Speaker Change: The biggest year-over-year variance in Q4 was the impact of costs, namely one-time cost variances, including timing associated with pass-throughs, a pronounced prior-year incentive-bound reversal, and SG&A inflation.
Speaker Change: As mentioned, FX and a late in the quarter headwind as well.
Speaker Change: Slide 15 shows our specialty segments KPIs in the fourth quarter.
Speaker Change: After flat year-over-year volumes in the third quarter, the business's multi-year recovery regained momentum with 9% year-over-year volume growth in the fourth quarter.
Speaker Change: The recovery was relatively broad-based by market within our specialty business, but Mix was skewed toward its largest market, the polymer space, which tends to consume lower-value grades.
Speaker Change: The trailing 12-month gross profit per ton graph illustrates a burgeoning inflection in our specialty business, especially now that we are lapping comparisons no longer distorted by elevated co-gen earnings.
Speaker Change: from the 2022 spike in energy prices in Europe and the related 2023 forward sales, which made comps difficult in the first half of 2024.
Speaker Change: On slide 16, you will see Specialty's fourth quarter EBITDA bridge, including the volume contribution that was partially offset by a lower portfolio mix as mentioned.
Speaker Change: The favorable year-over-year cost variance was driven by timing differences associated with feedstock pass-throughs and fixed cost absorption.
Speaker Change: You may recall, from prior disclosure, our intent to build inventories of certain desirable grades that were below targeted safety stock levels.
Speaker Change: That strategic inventory bill also helped the specialty segments cost variance in the fourth quarter.
Speaker Change: Slide 17 displays adjusted non-GAAP cash flow metrics for the year.
Speaker Change: We had a sharp improvement, partially seasonable, in our net working capital in the fourth quarter, and this helped improve our cash flow and leverage ratios sequentially.
Speaker Change: We finished 2024 with a net debt ratio of 2.86, which was down from 3.0 at the end of the third quarter.
Thank you.
Speaker Change: I will conclude my final comments on slide 18 which showcases the free cash flow inflection from 2024 to 2025 and then 2026.
Speaker Change: We are estimating a $100 million improvement in 2025 at the midpoint of our guidance.
Speaker Change: This was primarily due to lower CapEx, nearly $50 million, lower cash taxes, and improved EBITDA.
Speaker Change: Looking forward to 2026 with an additional $50 million reduction in growth capex once the conductive plant in LaPorte, Texas is completed later this year. We see free cash flow exceeding $100 million.
Speaker Change: This does not include any incremental EBITDA growth, which could drive this number even higher, especially if we see a move in the direction of market conditions closer to mid-cycle.
Corning?
Thank you, Jeff.
Speaker Change: So, this is a great slide to just sum things up and finish the call on. I want to stress, the Orion team is dedicated to these very dynamic times to be opportunistic.
Speaker Change: to be nimble, to be fast, to execute well, and by doing that, we are convinced.
Speaker Change: We can realize Orion's inherently higher value. And personally, I think this slide and the free cash flow inflection point that is upon us here, this is going to be a powerful catalyst for us. We're looking forward to that.
With that, Julian, let's open it up for some questions.
Speaker Change: Alright, 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. Confirmation tone will indicate that you are in the question queue.
Speaker Change: You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys. One moment while we poll for questions.
Thank you.
Speaker Change: And our first question comes from Josh Spector with UBS. Please proceed.
Josh Spector: Yeah, hi. Good morning, guys. I first wanted to ask just on the guidance for 2025.
Josh Spector: You went through a number of moving pieces earlier in the call, but I wanted to be clear on the macro assumptions, specifically around volumes and the import pressures that the industries faced.
Josh Spector: And, you know, within that, are you using your customer forecast for volumes? Are you saying that things stay the way they are? So, kind of just wondering how much of this you view as in your control at the midpoint versus needing markets to cooperate.
Josh Spector: And then I guess as a follow-up, you know, what drives the 20 million higher or lower? What's the biggest variable you see?
Hey Josh, this is Jeff.
Josh Spector: So hopefully I'll answer all your questions. If I missed something, let me know.
Josh Spector: With regard to volumes, on the rubber side, as we've mentioned, I think in the November call, we've had, we've won some additional lanes.
Josh Spector: with certain customers, and we are expecting rubber volume increases probably around the mid-single-digit range, something in that area, from those lanes.
Josh Spector: On the specialty side, we also expect some additional volume growth as we've seen over the past couple of years that those markets have recovered.
Josh Spector: I think about the, you know, kind of hitting the midpoint to your point, we'll probably see about a $10 million improvement in our operations in China, which we talked about also on the call in November.
Josh Spector: Probably another 10 to 15 million dollars between specialty as well as some improvements in the cogen area
Josh Spector: We have some additional variable comp costs which is a negative of about five million dollars. So if you add all that up you get about a twenty million dollar increase and that is starting off of the base of about two hundred and ninety million dollars and I'm using the two ninety to take our actual results and then adjusting them for FX as Corning noted in his prepared remarks. So some of this is obviously due to our customers. We have to use our customer
Thank you.
Josh Spector: forecast for this year. Now, the whole thing is going to turn potentially in imports and, you know, will there be help from that? That's not in our planning. That's not in our entire customer's planning. That's why we did the cost reduction to offset the inflation. So it's really not reliant on that. Of course, imports could go up or down, and we'll have to see how that plays out. But we're going to be active and dynamic in that environment.
Thanks for watching. Bye.
Josh Spector: Thanks. Maybe just one follow-up on the China piece. When you talk about getting Huawei running and then ramping, I guess kind of a similar dynamic of how much of that $10 million is just a cost avoidance versus you're assuming, I mean, I think you'd have to gain share in the market to fill that up. So what are the two pieces there?
Josh Spector: I'd say it's kind of getting back to where we were in certain specialty grades in China. I think there's room for that right now, especially in these more premium areas. Keep in mind before not too long ago we were exporting from Europe, from US, from Korea for these same grades into China.
Josh Spector: So, I think that's doable for us. There's going to be a mix in that of, okay, we have fixed costs and we didn't have enough sales. So, you're getting better absorption and cost performance in that regard, Jeff, but some of this is going to be just incremental volume of attractive material.
Okay, thank you. You're welcome, Josh.
Speaker Change: Thank you. And our next question comes from Lawrence Alexander with Jeffries. Please proceed.
Lawrence Alexander: So, good morning. Two questions. You know, first, can you speak to kind of your perspective on supply addition, particularly curious about competitive behavior or supply-demand balances in specialty blacks?
Lawrence Alexander: And secondly, are there any end markets where the carbon black intensity is also changing? I guess what we're trying to fish for is are there submarkets, again, I'm more interested in specialty than rubber.
Lawrence Alexander: where, if demand improves, there's an outsized benefit for Orion because of the impact on mix or technology shifts at the customers or formulation shifts or requirements.
Corning Painter: Okay, Lawrence, let me take a shot at it and then come back to me with a follow-up as you need. So I'd say, like, the biggest change in specialty from a market perspective is conductivity, and we all know EVs is not exploding and we're past maximum height there, but it's still a growing market and I think still an attractive one for us.
Corning Painter: So you've gotten that EV batteries, you've gotten that now energy storage systems. And I'd also say for that same, let's say conductive grades, the high voltage wire and cable markets, especially if you think about remote.
energy production relative to where the city centers are.
Corning Painter: You know within any given segment there are opportunities where they're going for more intensity or in our case exciting without looking for a higher specification of the carbon black or a higher performance carbon black but a lot of times than that you're looking at a more niche it's sort of like a wave effect of more of many of those things versus like a particular one I point to.
Corning Painter: So, we have de-bottlenecked some of our really advanced materials for coatings. And so, if you think about automotive top coat, that's an attractive market for us. The market isn't that great, right, for OEMs right now, I'd say. But we see people, like, wanting to adapt and qualify those materials. That's a plus for us.
Corning Painter: But it's like not a tidal wave in the way that conductivity, I think, is still a pretty big wave.
Does that help?
Yes, thank you.
Thank you. And our next question comes
Speaker Change: Thank you, nice guidance. What do you think operating rates are in Russia, China, and India, and do you think collectively they change in 2025?
Speaker Change: Well John, the big question there is going to be like what happens in peace and trade flows and all of that. So if there was peace
Speaker Change: I think you'd see some, and if they're led into Europe, right, which I think is a big question.
Speaker Change: But I think that's what's on investors mind. What's the risk scenario and that's
Case.
If they did come in...
Speaker Change: I mean, I don't think they'll get nearly what they had before, they were over a third of the market.
Speaker Change: We had customers who bought literally 50% of their carbon black from that. I don't think they're going back. And if they do, I don't want to ever hear about sustainability again.
I would stress to investors, we are raising prices.
in Europe before the war.
Speaker Change: And I think there's still a premium for local supply. And there are people building tire factories.
Thank you for joining us.
Speaker Change: So I think that's all a positive there. In terms of current operating rates, obviously I would suggest they're down a bit. In Russia, it's very hard to get good data, but I suspect some of the raw material is being used for fuel today. China always reports very large capacity relative to what they actually make. Kind of hard to read there. India went through some expansions. They probably got
Speaker Change: Good loading on the new plants, lower on the old, and in a scenario like normalization in Europe, I think some of the older plants in India would be ripe for just being retired.
Speaker Change: Secondly, your rubber volume was down 2% in the fourth quarter. What do you think unit tire volumes were at retail in your geographies in the fourth quarter?
Speaker Change: Well, so like if we just look at North America, they were up
Speaker Change: So, if you look at trade data, you can see tire sales in North America is easy to get good data there is really quite good. But if you look at like USTMA tire production, it's down quite significantly and tire imports are up quite significantly.
Speaker Change: I mean that that is the big story in the rubber carbon black demand and so again We're not counting on like that rehearsing tomorrow. We'll see what happens
Speaker Change: What we did in this scenario was to go out and get a few more mandates in terms of supply, those are often in other regions.
Speaker Change: That's going to show up in mix and so forth and we also move for some different customers because in our experience the customers most linked to premium brands and so forth are the ones who've been hurt the most in the current environment.
Thank you.
Speaker Change: Thank you. And our final question comes from John Tonlatang with CGS Securities.
John Tonlatang: Good morning. Thank you for taking my questions. My first one is just, Corning, obviously we get the free cash flow message.
John Tonlatang: a portion or percentage that you're willing to think about versus growth investments versus debt pay down.
John Tonlatang: Yeah, I really think about this as an opportunistic approach. So I think it depends a little bit on how we see business, cash requirements, but quite frankly, pretty significantly, where we see the share price. So I think that can vary for us.
John Tonlatang: a bunch of professional investors on this call, right? The goal is to buy low and you have to be opportunistic about this, I think to do it well.
Speaker Change: Fair enough. And then can you give us an update on Laporte and you know when we might expect to see some things like off-ticket agreements or qualifications on that?
Sure.
Speaker Change: So the plant's advancing well. The super modules, which might have seemed like the biggest risk coming from China, were in on schedule. It's more the U.S. equipment that's been a challenge.
Speaker Change: But nonetheless, we expect to be finishing that up late this year.
Speaker Change: doing qualifications next year, we are actively signing customers and sampling them with the product that we make, or supplying them with the product that we make today in France. Our whole strategy around the French plant is not to maximize EBITDA, but to maximize the number of customers who we have in supply from the site. And customers are willing to accept that because then, you know, they can see this pathway to go ahead and qualify.
Speaker Change: Laporte. That said, they are going to have to qualify Laporte, and in many cases the more valuable, the more profitable, the more differentiated that guy's application is, it will have to go through a qualification process, oftentimes also involving their customers.
Speaker Change: So I would expect us, we'll be operating in 26 and we will be probably in early days, right, getting some maybe lower quality sales in there as we work through the qualifications. And, you know, I would expect.
Speaker Change: to be clear, 26, 27, really to be heavy in the qualification phase while slowly ramping that up as we go through it.
Speaker Change: Okay, great. Does that give you some color there? It helps, yes. Thank you. And if you could, just could you just give us a sense of relative to Q4 and Q3, you know, how much pressure are you seeing from import markets today? Has it improved or are you seeing more or less?
Speaker Change: and kind of is that is that being impacted by whatever people think might be happening with tariffs?
Speaker Change: Right, so let me just stress, when we talk about imports, I'm really talking about tire imports. I'm talking about the imports that impact my customers.
Speaker Change: And in that sense, we really did not see a let up. We, and if you listen to some of the large tire companies and their earnings releases, they're all saying the same thing. They were heavily impacted by imports. Keep in mind, in the United States,
Speaker Change: It's a matter of imports from the rest of Asia, not really from China.
Speaker Change: that's heavily tariffed. In Europe it's heavily impacted by exports from China, South America, also more China.
so different regions have different elements of what the
Speaker Change: import regime would look like. It's not like there's no carbon black traded, but like the big thing for us I'd say is really tire demand.
Speaker Change: Okay, so you haven't seemed to let up in Q4. No, I haven't and I would not be banking on it. I mean, opportunistically is good for us because I try to make it clear in the call, like, we don't know how exactly this is going to play out and it's our job to be nimble, to be opportunistic, to make the most of this, however it plays out, but not.
Speaker Change: to be sitting here with a strategy that we're hoping for, right? I'm prepared for that not to happen and for imports to stay right where they are. That's the world we got to be ready to navigate. And if we see tariffs, it's all upside.
Fair and understood. Thank you.
Byron
Speaker Change: I think we have one follow-up from Josh, is that right? Yes, we do. Josh Spector with UBS.
Josh Spector: Yeah, thanks. If you guys don't mind, a few kind of...
Speaker Change: buttoning up a few items. So first, just on LaPorte, I think your last answer was helpful, but
Speaker Change: I put it net, it's going to be negative certainly in the early quarters we're going to have the operating costs and the labor costs and it's going to take a while to do it so I would not look for that to be a contributor in 2026.
Speaker Change: And that element we put out is the free cash flow projection, right? That's really heavily driven.
Speaker Change: by, you know, just the reduced capital because we've completed that and we don't need to build another one right now.
Speaker Change: Okay, thanks for that. And then I wanted to just ask as well kind of a follow-up to John's question around Russia.
Speaker Change: I mean, I'll walk through some simple math and I'd just be curious on your thoughts here. I mean, I guess investors are looking at your rubber earnings about $100 per ton on an EBITDA level above what they were pre-pandemic.
Speaker Change: You know, call it around 700 KT of rubber supply, about 40-ish percent of that, into Europe. You run through that math, you know, if things reset, you're in a 25 to maybe 30 million dollar negative.
Yeah, so I would say I would be thinking...
Speaker Change: If you think about it, put yourself in the shoes of a buyer trying to keep a factory running that makes tires in Europe.
Speaker Change: I think the local supply is still going to be what you want. So a supply chain stretching from India or China, I think, is going to lose some of that share to a supply chain coming in from Russia, even with all the, you know, concerns and all of that.
Speaker Change: I think it's really going to be a shift in where they import from.
Speaker Change: I mean, keep in mind, we and our competitors can serve, you know, not quite two-thirds of the European market. Well, it depends on how many tires are being made, so let's say two-thirds of the market. A third's got to be imported, and I think it's really going to shift around that part of it.
Speaker Change: And again, we were raising prices before the war, and keep in mind also, Russian Carbon Black was only banned last summer.
Speaker Change: So I think that that concern is a little bit overstated. That's my opinion.
Speaker Change: Okay, thanks. I'll leave it there and chat more offline. Thanks, guys.
Okay, thank you.
Speaker Change: Okay, I think that then wraps it up for questions. I just really appreciate everybody's time and interest and the questions. Once again, I'd say like the big message here is that last slide, the free cash flow inflection. We do not need to continue to spend in the way we have. That's just going to open up free cash flow for us. We've got a number of things we can do with it. I think that's just, you know, a big move for us.
Speaker Change: Next up, just so we all know, we'll be at multiple investor conferences, and we'll be doing a couple NDRs in the coming months, and we look forward to the engagement and hope to see some of you there. Have a good rest of your day. Thank you very much.
Thank you.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.