Orion Engineered Carbons S.A. (OEC) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Orion Engineered Carbons First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, nDiana Downey, Vice President of Finance and Investor Relations for Orion Engineered Carbons. Thank you. You may begin.

Thank you, operator. Good morning, everyone and welcome to Orion Engineered Carbons conference call to discuss first quarter 2016 financial results. I'm Diana Downey, Vice President, Finance and Investor Relations. With me today are Jack Clem, Chief Executive Officer; and Charles Herlinger, Chief Financial Officer. We issued our earnings press release after the market closed yesterday and have posted an accompanying slide presentation to the investor relations portion of our website. We will be referencing these slides during this call. Before we begin, I would like to remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the SEC. Actual results may differ materially from those described during the call. In addition, all forward-looking statements are made as of today, May 6, 2016, and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, non-IFRS financial measures discussed during this call are reconciled to the most directly comparable IFRS measures in the table attached to our press release. I will now turn the call over to Jack Clem. Jack?

Thank you, Diana. Good morning and thank you for joining us today for our first quarter 2016 earnings conference call. Our agenda for today is shown on Slide 3. I will begin the call by providing highlights for our first quarter and comments regarding our two Carbon Black businesses. Then I will turn the call over to our Chief Financial Officer, Charles Herlinger, who will provide more details on our financial results and discuss our outlook for 2016. After Charles is finished, I will return to make a few closing comments and then open the lines up to take your questions. Starting with our first quarter highlights on Slide 4, we are pleased with the results and consider this another solid quarter of growth for Orion, particularly given the persistent headwind we continue to face in this low oil price environment and its impact on our feedstock costs. These solid results come from volume growth which continued to outpace the markets, robust cash flow and record results from our Specially Carbon Black business while our Rubber Carbon Black business performed reasonably well in a very tough market. The takeaway here is that our strategy of emphasizing higher value, more profitable Carbon Black products continues to deliver the results we have targeted for growth and for profitability. This was the second quarter in a row where we grew volumes by approximately 10%. Sales from the newly acquired Chinese facility helped bolster these figures but even absence these new Chinese sales, our organic growth was 4.9%, a figure in line with our strategy to maintain global leadership in specialties and grow at or above the regional markets in our Rubber Black business. Adjusted EBITDA increased slightly to €54 million in the first quarter of 2016 from €53.9 million in the strong first quarter of 2015 during which oil prices were high relative to today. Sequentially our results improved by 6.1% from €50.9 million in the fourth quarter of 2015 on stronger performance by both businesses. Our adjusted EPS was €0.28 per share. In keeping with the capital allocation strategy we discussed with you last year, we voluntarily repaid another portion of our debt and continued our stock repurchase plan. Slide 5, provides detail on the product mix from both businesses in our key market regions. We also show the positive long-term performance trends for these businesses. Please note that our Specialty Carbon Black business accounted for slightly over 21% of our volume in the first quarter of 2016 a level consistent with that seen over the past few years. But the businesses adjusted EBITDA has risen sharply as a percentage of our total increasing to a record 64% of total adjusted EBITDA. This is up from 53% in the prior year on a combination of strong results with specialty and the headwinds faced by the Rubber Black business. The twin chart show gross profit per ton and adjusted EBIT margin for our two businesses over time. Our Specialty business continues to improve on its prior impressive results as it builds momentum. So please note that adjusted EBITDA margin for both businesses have continued to improve over time and as a result among other factors of our ongoing strategic intention to shift to higher value add products including shipping capacity to specialty production and moving rubber volumes to more technically unique grades including those sold to the mechanical rubber goods industry. Of course we remain committed to productivity improvements which have been especially critical to improving the performance of our Rubber Black business. Our sales are not so diversified around the globe and with the addition of our new plant in Qingdao we improved on this measure considering the growth of the markets in Asia-Pacific and specially China. Let's turn to Slide six and discuss the Rubber Carbon Black business first. Rubber Carbon Black volumes increased to healthy 8.4% to 218.7 kmt in the first quarter of 2016 of which about three quarters of this increase came from sales via our recently purchased facility in China which added 12.6 kmt to our total volumes. Absent this contribution volumes still would have grown at slightly over 2% or roughly in line with projected worldwide GDP growth for the period and that expected in our targeted regions. By geography we grew sales in Europe, Korea and South America while South Africa saw values decline. The U.S. also declined due to slower demanded at some accounts in the first quarter relative to a strong 2015 first quarter and a deliberate shift in product mix to more value-added grades. Revenue declined by 22.5% to €149.2 million on the resulting pass through of feedstock costs to our customers. Gross profits also declined falling 16.7% from €43.6 million to €36.3 million due to negative feedstock impact and to a lesser extent unfavorable foreign exchange translation effects which was partially offset by our volumes in China. The differential experience between product pricing and real cost of feedstocks was €2.8 million for the quarter. We expect to see this impact improve as we move through the year. While adjusted EBITDA in our Rubber Carbon Black business decreased this quarter dropping to €19.5 million as a result of the negative feedstock cost development we held the adjusted EBITDA relatively stable at 13.1%. The stability in the adjusted EBITDA margin is both a function of the decline in reported revenues due to the pass through of lower oil prices as well as our ability to manage our gross profitability effectively as a result of these lower oil prices. We announced in March of this year that our Rubber Carbon Black business would be implementing a surcharge based on the feedstock cost that we are experiencing especially those in Europe which was to be effective April 1. We've gotten some traction with this initiative and expect to see some positive impact on our margins as we move into the next few quarters. Cost negotiations continue however and while we are optimistic given the sensitivity of this matter we will not comment further on it at this time. Further it would be premature for us to make any assessment as to how these efforts will play out over the course of this year. Now let's move to our Specialty Carbon Black business. Turning to page seven, as you can see, this business clearly had a great quarter with record results on a number of key metrics. Volume of the first quarter of 2016 increased 15.7% to a record 59.2 kmt versus 51.1 kmt in the prior year with volume growth occurring in all graphic regions. Growth was particularly robust in NAFTA and Korea with NAFTA benefiting from strong sales of polymers, coatings and inks. Korea benefiting from strong regional demand and many smaller market sub regions that benefited from our ongoing global investments to strengthen sales and technical support to increase penetration of our new products and product extensions. Revenue declined only slightly falling 1% to €97.1 million a strong volume growth almost completely offset the negative impacts from price declines resulting from the agreements where we pass along feedstock cost to customers and some smaller impact from regional product mix. Gross profit for Specialty in the quarter rose a strong 16.7% to €45.3 million as our gross profit per ton remained quite stable at €765 a strong testament of our ability to manage price effectively in the face of lower feedstock cost. The leverage produced by growth and active price management resulted in adjusted EBITDA surging 20.7% to a record €34.5 million compared to €28.6 million in the prior year's periods. Our adjusted EBITDA margin also improved driving to a record 35.5% and 29.1% in the first quarter of 2015. I think it is worth reemphasizing that this steadily growing and highly profitable side of Orion accounted for almost two thirds of our adjusted EBITDA in this quarter. I'll now turn the call over to Charles who will begin with an overview of our consolidated performance.

Thanks Jack and let me also wish everyone a good morning. Turning to Slide 8 and our consolidated first quarter results, as Jack stated, our volumes increased by 9.9% or 24.9 thousand metric tons from the prior year to 277.8 thousand metric tons of which only OECQ accounted for 12.6 thousand metric tons. As has been the case for some time, we grew volumes in both our businesses in the first quarter of 2016 and we remain optimistic that our growth initiatives in tandem with attractive end market demand will allow us to continue to do so in the future. Faced with sales price declines resulting from the pass through of lower feedstock costs, our revenue accordingly declined this quarter by €44.1 million or 15.2% to €246.3 million from €290.4 million last year. The strong performance of our Specialty Carbon Black business produced a 4.1% gain in our overall contribution margin to €114.2 million in the first quarter of 2016. This was €109.8 million in the prior year's period. As the waterfall chart on the right shows, volume led by Specialty Carbon Black is the key driver in the quarter of the Contribution Margin improvement, more than offsetting differentials and currency headwinds. We delivered adjusted EBITDA of €54.0 million representing a slight year-over-year increase, but on adjusted EBITDA margin of 21.9% an increase of 330 basis points above last year's first quarter. Referring to the second waterfall chart on the right, adjusted EBITDA was primarily boosted by the contribution margin increase which was offset by the sales support investments we made in Asia and fixed costs associated with the newly acquired OECQ. Lastly our net income in the first quarter 2016 was €13.4 million down 9.4% from €14.8 million in the prior year's quarter. As the final waterfall chart on Slide 8 illustrates, higher depreciation and nonrecurring items fully absorbed a positive impact of lower financing costs. Let's turn to Slide 9 which reviews our first quarter cash flow dynamics as well as covers balance sheet metrics. As we demonstrated every quarter since we've been public, we're a strong cash generator. In the first quarter of 2016 we generated €60.1 million from operations which includes a €16.9 million contribution from a further reduction in our working capital. Our uses of cash flow this quarter which include capital expenditures, interest payments, required debt repayments and dividends total €44.7 million giving us available free cash flow of €15.1 million. This excess provided us with ample flexibility to voluntarily repay debt of €20 million and repurchase approximately 300,000 shares of our stock. Turning to our balance sheet, net working capital totaled €172.3 million as of March 31, 2016 compared to €183 million as of December 31, 2015. Days of net working capital at the end of the first quarter were 64 days flat with the year-end figure. As of the March 31, 2016 the company had cash and cash equivalents of €57 million which represents a decrease of €8.3 million versus December 31, 2015. The company's indebtedness as of March 31, 2016 was €623.9 million and our net indebtedness was €577.1 million which represents a 2.78 times LTM EBITDA multiple down from 2.89 in the previous quarter. Our goal remains to steadily reduce this multiple over the next several years through a combination of free cash flow and adjusted EBITDA growth. As a reminder, the noncurrent debt chart on the bottom right corner of this slide is designed to illustrate the fact that some of our debt is denominated in U.S. dollars, but reported in euros and thus gets revalued every quarter as these currencies fluctuate. So while our debt appears to have risen at times over the past year, the increases were in fact accounting adjustments due to changes in the value of the U.S. dollar. Moving on to 2016 expectations, Slide 10 provides you the macroeconomic assumptions we're using as recently provided by the IMF World Economic Outlook database. The regional forecasts here are unchanged from those we provided on our last call. To recap, with the exception of Brazil, our remaining markets are all expected to see moderate to good GDP growth in 2016. The same holds true for the auto build numbers that are shown in Slide 11 as they are all still expected to largely track regional GDP growth rates. Turing to Slide 12 which represents our guidance and our cash flow analysis for 2016, while we have seen a slight improvement in the oil and feedstock pricing environment over the past couple of months and we have started the year with good first quarter results, we are holding the 2016 EBITDA guidance range of between €205 million and €225 million that we provided on the fourth quarter conference call. At this point in the year though there is still uncertainty ahead for example in oil and feedstock pricing in the outcome of the price negotiations underway with our European customers as well as in local economic conditions, this in our view calls for taking a wait-and-see approach as the year unfolds. In terms of other full-year guidance metrics, we continue to target a 35% tax rate as well as depreciation and amortization of €60 million and €20 million respectively. Our capital expenditures we now project €60 million. I will now turn the call back to Jack, who will provide some comments on operational priorities for 2016 and discuss our responses to ongoing oil price deflation.

Thank you, Charles. We remain focused on the operational priorities discussed with you in the past and listed on Slide 13. Even though oil prices have recovered some over the past few months they remain at a level which requires us to continue actions to offset the impacts of this low oil price environment. These responses continue to include shifting lower value grades and capacities to higher value products and maintaining focus on improving raw material efficiencies while streamlining our production network. We are encouraged with our surcharge in Europe is finding some traction also the market environment is looking a little better with the U.S. showing strength in replacement tire demand not seen in quite some time. Integration of our facility in China is going well with performance in utilization at or above our expectations. And our Specialty business continues to excel in all measures continuing to push Orion's product mix to more technically complex products. In summary, we continued to be optimistic about our ability to profitably grow volume in both of our businesses. Based on the confidence we have in our team and the strategies it has developed to improve yields, increase operating efficiencies and transition to higher value-added products. We will drive innovation and maintain leadership in our Specialty Carbon Black business as it continues to be our major engine of growth and profitability and we will manage the headwinds faced by our Rubber Carbon Black business, remaining focused on optimizing our production network, maximizing our profitability as we maintain share in our target markets. As always we wish to thank our investors for their competence in Orion and all of our employees for their hard work during this past quarter. With that operator, please open the lines up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your questions.

Hi thanks for taking my questions, nice quarter. A couple quickly, is in the Specialty businesses I understand that you are looking for above market growth, but the 16% was I would imagine multiples above whatever the markets have been growing. So, how would you differ if you look at the volumes on a year-over-year basis, how much of that was sort of growth out of your traditional markets versus growth out of the initiatives that you've been talking about the past year or past couple of years if there is any way to differentiate that?

It is a good question Ivan and is a little hard to differentiate the difference between the two. I mean what you are seeing is really a result of a lot of initiatives that have come in the past. I mean that is a spectacular growth of that particular quarter and I wouldn’t pretend to say that we will continue to grow it that way going forward. I mean we're committed to growing at greater than market rates which that’s a great head start on 2016 to beat the markets for the year. But I would say it is a culmination of a number of things. As you know we've converted some capacity which we've put into play right now into our Specialty markets we've been pursuing some particular initiatives for growth in the polymer industry, particularly in Asia-Pacific which have come to pass very nicely for us. And in Italy we've put a lot of new people in locations which here before we did not have such as Southeast Asia, South America and so forth and those are beginning to pay off as well. So maybe it is a bit of a step you know occurring because some of these things came together very nicely after the first of this year, but distinguishing between the different areas is something I'm not prepared to do right now. But I would say it was a great quarter for that particular business.

Great and then did you see any sort of I guess within this business or Rubbers for that matter, did you see any sort of I guess increase in volume demand or order patterns as you moved through the quarter as oil started to rise, so I was expecting that you saw a little bit destocking in the first half of the quarter versus restocking in March and then maybe heading in April as oil accelerated or is that or did you not see any impacts from that?

This may be a little bit Ivan, stocking, destocking typically is not a huge issue in our business. You see it a little bit in some of the Specialty products particularly in the distribution network, it is a little difficult to do in the Rubber Black business just simply because of the volumes and the need to manage that supply chain. But perhaps we saw a little bit of it is as oil began to rise in that distribution chain, but I don't think it was a major factor certainly not the volume for that growth rate the first quarter.

Great and then switching over to the Rubber Black side, did you see within the Americas, North-South as expected Brazil remains pretty weak, did you see growth in the U.S and where you saw the volume trends in the Americas South and North?

Well, you know, I think the whole South American story has been told and retold. It continues to be pretty slow. Our business down there has picked up as we moved into 2016 with a smaller player there. So a little bit of change can make a big difference for us. So our operating rates for our facility in Brazil has actually moved up into the 80s now utilization rates. So that's okay for us, but we can see generally the overall demand trends in South America are pretty lackluster. Looking at North America, particularly the U.S. we do see some demand. It started out a bit slow, just thinking about the quarter as it unfolded January was a bit slower than what we thought, but as we moved through the quarter it began to tighten up. Currently our operating rates in the U.S. are pretty high right now, probably the highest operating rates we have actually in Europe. But it's strengthened as it has gone through the quarter and I think it's a little bit associated with the replacement tire demand beginning to finally loosen up some of the lightened demand in that market seems to be coming - come into play as we moved through this quarter.

Great and that I know you don’t want to comment on the and surcharges but I guess I'll ask the question anyways, did – how much of the volume in Europe for you is I guess, spot or contract or business that you could actually the surcharges would actually impact if at all through the years it sort of is it 10% of your business or is it 50% of the business so I know most of it is contract, correct?

You are correct Ivan, I really would prefer not to comment on it.

Okay and then last question is and this is primarily for Charles, in your cash flows guidance on Slide 12 as you talk about net working capital the change being zero, what sort of the base of oil they are using there? So I understand that $10 up and down impacts it. If you look at zero what should I, should $40 be the number then $10 up and $10 down?

Yes, a little bit less than $40 actually Ivan and so you know if oil continues to kick up a bit we will see some cash locked into working capital in the dimensions that that you’ve already referred to. But we modeled the projections and still do on the average oil price that we saw in Q4 of last year moved around a lot. That's why we decided to average it at the high 30s. So there might be a bit of absorption of working capital as Q2 unfolds.

Great and I guess building on that and it's truly my last question, so if you look at your free cash flow for the year your expectations it's – there's nothing else in there except for take, I guess the 200 and some million in euro that you're looking to generate in EBITDA and then subtract 95 and that should be pretty much where you're expecting your free cash flow again this year?

Yes and then with that our regular dividend which we're very committed to, with some additional CapEx and then we look at our debt levels as we did in December.

Thanks a lot for taking my questions.

Welcome.

Thanks Ivan.

Thank you. Our next question comes from the line of John Roberts with UBS. Please proceed with your question.

All my questions have been answered. Thank you.

Thank you. [Operator Instructions] Our next question comes from line of Charlie Webb with Morgan Stanley. Please proceed with your question.

Good morning guys. [Indiscernible] just a couple from our end. Firstly, on the Asian sales support drag of $2 million on the EBITDA, just kind of getting an idea of how long we should expect that to continue, is $2 million a good run rate as we move through the year? That’s the first question. And then the second question a bit more high level around the oil price, if we see the oil price steadily grind higher, what should we think about in terms of gross margins and the raw material differentials for the business?

Let me have a go that and Charlie and Jack will chime in I'm sure. On Asian sales support remember that it’s a bit lumpy and you've said dragging down EBITDA realize it is that investments in Asian sales support is partly driving, significantly driving the spectacular performance we’ve had in Specialties.

Sure yes.

So we'll dose in technical sales support anywhere in the world, particularly on the Specialty side where we expect to get a good payback. And so it's somewhat lumpy, that just happens to be the comparison of Q1 to Q1, but that is a fairly large step for a quarter change. I wouldn't expect to see that certainly every quarter, no. But – we like that investment in the sense that it really allows us to maximize the performance of our businesses.

Okay.

Commenting on the oil prices, oil prices in and of itself has couple of different impacts on the businesses, so clearly if oil arises the impact on Specialties it could begin to compress some of those margins, but we've been pretty capable of passing on those prices and holding onto them if they go forward. So how that works out, has a lot to do with the competitive dynamics of that specialty market. But other than that I don't like to think I could comment on it a whole lot more. In the rubber business oil price in and of itself rising is not the factor. It's the impact that oil price rises with respect to different types of movements in oil price the differentials, the freight, the arbitrage opportunities and that sort of thing that's hitting and then when you get into that you get into a whole lot of speculation. In and of itself, rising oil environment, because of the way the oil has behaved in the past, if we use that as pattern going forward, we think it's net-net better for us, better for the rubber business, because it does give us more opportunities and more flexibility to buy and tap different types of feedstocks for our facilities. Quite frankly, also as oil price rises, it gives us a little bit more of a boost in some of our energy sales, because as you know, we cogenerate quite a bit and our cogeneration revenue will depend on the price of oil. So there is some upside there as well. But given you a rule of thumb it would be very difficult at this point in time.

I mean Charlie just to remind you, we have said in the past just to sort of echo what Jack just said that in the Specialty space, we would expect if oil goes back to whatever 90 that our EBITDA margin as a function of revenue will come down. But that has nothing to do with our absolute EBITDA earnings and our ability to recover price increases from the market as oil moves up. So that is - the margin is something we obviously provide and we comment on, but it is by its very nature it has that function with oil price.

Sure, understood. Okay, thank you very much guys.

Thank you.

Thank you. Our next question comes from the line of Chris Kapsch with BB&T Capital Markets. Please proceed with your questions.

Yes hi, I had a follow up on the, just the commentary that you’re, the feedstock differentials had improved a little bit. The curiosity I have is, is that more a function of oil prices recovering and therefore I guess some of the pass through indexes doing a little bit better or is it more a function of the availability of your feedstocks maybe with greater availability from better pricing or I guess the small factor would be this one that you just mentioned Jack, the cogen credits looking a little firmer. I'm just wondering if you could elaborate on which is driving the improvement sequentially in feedstock differentials? Thanks.

We had said as we had gotten close to the end of last year that we have seen a relaxation of feedstock differentials and I guess from a relative standpoint, we’re speaking here of improvement over the worst conditions that we saw which were literally in the second and third quarter of last year, some relaxation in the fourth quarter of last year which we said we thought would continue going into the first quarter of this year and that is what we're really referring to. So we have seen some of that. I think what drove the, again the relaxation of differentials from say mid-year last year to now is just a bit of the, I guess the oil markets have a tendency to kind of find more of a stable position than what they have. There was a real dislocation with the fall of oil last year which puts this differential in place because of the excess demand of products from the Gulf Coast and a few other things that occurred at the same time. Some of those things that sort of sorted themselves out in the system now which has brought this relaxation in differentials; however, having said that, there is still that $2.8 million that we experienced in the first quarter of 2016 is still a pretty stiff headwind for us as we sit back today and a lot of that is associated with just simply differentials between what we buy and then what we pass along to the customer. And that is what we're trying to sought out right now with this, some of this surcharge activity that we have going on.

Is there a region where the differentials have improved more than other regions where they haven’t improved as much?

Actually the U.S. has improved versus prior year. We've seen those come back a little bit. So the U.S. Gulf Coast differentials have gotten a bit better. Some of the European differentials continue to be pretty difficult.

Got it and then if I could ask about the businesses that you folded in or acquired now in China, couple of things, one the if you could just talk about the business trends in China how that looked may be sequentially through the quarter? And then, I think you have talked about this business is one that you wanted to shift over more towards Specialty over time. Could you just talk about what is that mix of that business in China is currently and what maybe what the asset utilization rate is currently?

Yes, the facility was and is dedicated to more high-end Rubber Black products and we've begun to move into some of the Specialty, some of the non-Rubber applications with that plant since we've acquired it. I mean the large majority of the material that is produced there is not commodity ASTM grade but more tapping into the mechanical rubber goods in the high-end mechanical rubber goods. It is a premium plant for producing that type of material in China and as such it has a tendency to follow more of the auto build in China then it does just the replacement market which has more of a tendency to [indiscernible] more commodity materials for their raw materials. So while the auto build remains okay in China, it's not gone leaps and bounds, but it's still very large. That plant has maintained a fair degree of capacity utilization. Having said that, we also are beginning to move to bring it into some of the Specialty products right now. I really would rather not comment just how much we're doing there at this point, but it's a fair percentage and it's one that we intend to grow to a substantial part of its capacity as we move through 2016 with pretty strong plans to have a fair position there in 2017 particularly in the polymer and in the printing inks markets.

Okay, that’s helpful. And Jack any comment on just the sequential demand trends in China during the course of the March quarter? Thanks.

It's running roughly at the same utilization rate that it was at last quarter and then we got two quarters of ownership with it at this point and we have historical data looking backwards I would say it's running reasonably the same rate. No trends up or down really.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of John Roberts with UBS. Please proceed with your question.

Great, thank you. Simply raising the price in Rubber Black helps, but I don't think it's going to give you - structurally solve your issue of basis differential or divergence here. Are you working on any structural changes to the pricing model with the Rubber Black customers, maybe something like a year in true up to or I don't know what else you might be thinking of?

John, talking about pricing and this kind of approach is always a little touchy. Let me just comment on what I can comment on there. What we're doing right now with the surcharge is simply trying to address some immediate issues that we have with the dislocation or imbalance between the purchase price and the sales price of our products. But I think we and I believe a good part of our customer base recognize that this is just a temporary patch that indeed we need to have some sort of structural change. And as we move into our contract season, which will begin shortly for 2017, I mean this is likely, not likely, it will be very, very high on everybody's priority list to see what we can do to actually deal with this. A true up at the end of the year maybe not, but probably more likely a better recognition of what's going on with differentials and a mechanism with that really would not want to go into right now, that would give better transparency and better look through opportunities, because at the end of the day our customers want to know that our formulas are behaving like we want them to behave which is a pass through. I mean we're not in the business necessarily of speculating on oil or the energy. What we would wish to do is make money on what we do well, which is efficiency capabilities and the sale of products around the world. But what we'd like to have this is a true pass through mechanism in our formulas. So we made that very clear. I had these discussions myself with many of our customers and they seem to understand that. So that's I think is spot on. A patch is not going to be the solution, it's got to be a structural change in the formula to make it a more through pass through.

But one of their primary objectives I assume is to be able to hedge their cost and therefore we have to stay linked to some financial hedgeble fuels benchmark prices I would assume. And so there have to be some sort of lag mechanism I would assume, so that they don't get, they don't want to be surprised in the short term and they want it, I think to be able to lay off some of the financial – some of the raw material risk to the financial markets is that fair to say?

And maybe I personally have not seen a lot of activity from a customer base in hedging Carbon Black. There may be a lot of hedging going on with natural rubber or synthetic rubber, but I have, I personally haven’t seen it in Carbon Black.

So you don’t think they – synthetic price is linked to hedgeable fuel contracts you know that they actually use that to hedge?

I don't have any personal experience within the car companies. I'm just telling you that I haven’t seen or been witness to that in those companies. We have had several conversations with many of our customers about their wish or their, I guess their exploration of that particular mechanism, but I've never seen it come to fruition.

Okay, thank you.

At least not with our involvement.

Thank you. Mr. Clem, there are not further questions at this time. I'd like to turn the floor back to you for any final remarks.

Okay, well thanks for joining us today and for your questions. We hope you'll agree with us that 2016 is really off to a very good start and it's results that we have given you has – give you good reason to share the optimism we have about our company and about its future we believe that to a lasting position in this great business and think that this view point is becoming more widely accepted with every quarter's results like the good results that we had this quarter. We appreciate your interest in Orion. We look forward to speaking with you again. We'll be doing that when we report on our next earnings at the next quarter I early August. So again, thank you for your attention and have a good day and a good weekend.

Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.