Greetings and welcome to Orion Engineered Carbons Second Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Diana Downey, Vice President of 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 second quarter 2018 financial results. I’m Diana Downey, Vice President, Investor Relations. With us 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 the slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during this call. Before we begin, I’ll 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, August 3, 2018, 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.

Thank you, Diana. Good morning everyone, and thank you for joining us for our second quarter 2018 earnings conference call. For today’s agenda, shown on slide 3, I will cover our second quarter performance, key metrics and commentary on our Specialty and Rubber businesses. Our CFO, Charles Herlinger will then provide details on our financial results and discuss guidance for the full year 2018. After that, I will come back and share with you our view of the markets especially how we view the remainder of the year and the opportunities and potential challenges that lie ahead of us. We will then open the line to take your questions. Referring to slide 4, I will start with an overview of our second quarter performance. I’m pleased to report that by any measure, strategically, operationally and financially, we performed well and posted strong results for the second quarter, in fact, record results. Adjusted EBITDA grew 26.1% to $81 million, surpassing our previous record of $76 million, which we achieved in the first quarter of this year. Earnings per share were up sharply to $0.88, which included a one-time gain of $0.19 from the sale of land in Korea. Excluding that gain, adjusted per share earnings rose to $0.69 from $0.40 in the second quarter of 2017, and in a continuation of the second quarter fundamentals, we grew volume in both segments, while improving pricing. In Specialty, we have been focusing on recapturing margin that had been eroded by rising feedstock costs. We accomplished this in the first quarter, but needed to continue with these efforts in the second quarter as energy prices continued to rise. As you will see on the detail, we pushed gross profit per ton above the first quarter’s results due to good work on price management, a…

Thanks, Jack. Good morning, everyone. Turning to slide 12, on our consolidated second quarter results, overall volumes increased by 3.4% or 9,000 metric tons from the prior year’s quarter to 275.6000 tons, reflecting stronger volumes in both segments, particularly within NAFTA, Europe and South Korea. Revenues increased by 18.8% to $391.6 million in the quarter, compared to $329.6 million last year, primarily due to the pass-through of higher feedstock costs, positive foreign exchange rates translation impacts, increased volumes, increases in the base selling prices and mix impacts. Our overall contribution margin increased strongly by 19.5% in the second quarter to $155.1 million versus $129.8 million in the prior year’s period. As the top waterfall chart on the right hand side of the slide shows, the increase in contribution margin includes positive effects from foreign exchange rate translation, pricing actions, feedstock and energy impacts as well as volumes. Referring to the second waterfall chart on the right hand side, which shows the development of adjusted EBITDA, the contribution margin increase in the quarter was partially offset by some additional fixed costs and by negative foreign exchange impacts on our fixed costs. As a result, adjusted EBITDA increased by 26.1% to $81.1 million. Our adjusted EBITDA margin of 20.7% increased 120 basis points versus last year’s second quarter, reflecting a higher adjusted EBITDA. The waterfall chart on the bottom right hand side of this slide analyzes net income development, which showed an increase to $52.7 million versus $18.4 million in the prior year’s quarter. As a result mainly of the increase in adjusted EBITDA, a gain on the sale of land in South Korea and a reduced effective tax rate, which is in part related to the taxation of the land sale in Korea, as well as reduced finance costs. Now turning…

Thank you, Charles. Turning to slide 15, we saw a strong business momentum in the first half of this year, which we believe will continue for the remainder of 2018. While we do not expect to see the tailwind of foreign exchange translation experienced in our first half to continue into the second, we do see demand and improving operational efficiencies continuing. This encourages us to tighten our guidance and begin to look even beyond the second half into the following year, where we believe this market strength and our strategic focus will benefit Orion. We’ve included slide 17 in the appendix to restate those strategic actions we are taking to drive value creation. Our margin recapture initiative has served us well. Rubber demand remained strong in a very tight supply environment with little in capacity coming online in the near term. Our investments in Korea and in Italy, in new line and deep bottlenecks in Germany will support continued growth in specialties at or above market rates, efficiency gains will continue as a key component of our deployment of cash generation, and we are encouraged by the early results we have seen in improving our contract pricing in 2019. While, I’m confident in our execution capabilities and encouraged by the general economic news we hear, we are monitoring the talks of tariffs and trade restrictions. So far, we’ve yet to see any direct impact on our business from the recently announced tariffs. But as a global concern, we have to be prepared to respond to these matters if this becomes a drag of global economies. That being said, if oil prices continue to move sideways, foreign exchange stays more or less steady, and assuming demand remains strong as strong as it was in the first half of the year, we are well positioned for a solid 2018. As we look out past 2018, with supply expected to remain constrained and demand expected to move up, we feel good about the market dynamics for 2019. Even with some investment in capacity expansion and our own debottlenecking initiatives, supply-demand dynamics are not likely to change in the near term in a meaningful way. All these factors lay the groundwork for continuing the strong profitable growth of Orion. Operator, please open the lines up for questions.

[Operator Instructions] Our first question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

Looking at the guidance, so if I look at the first half of the year you earned a 157 million of EBITDA, and the guidance implies the back half of about 128 to 143. So it’s pretty decent size step down for - I don’t think there’s a lot of seasonality in Carbon Black, and I realize that FX is come down a touch year. So wondering if you can maybe size up for us again the sensitivity to FX movements now that you’re in U.S. dollars, I know that’s changed a little obviously compared to when you are reporting in Euros, and is there anything else that would cause the EBITDA to slow down in the back half of the year? Just wondering if you could help frame up why things - given the positive momentum, the spot pricing, the solid volumes, I think the Korea consolidation going to be a bigger benefit in the back half. Why would we see a little bit earnings slowdown to that degree in the back half?

Kevin, it’s Charles here. Just as a background comment we are signaling, awaiting towards the higher end of the guidance range, I made that statement up front. You asked about the FX sensitivity, as our currency is change by five baskets of currencies we deal with changed by 5% up or down. It impacts our adjusted EBITDA on an annualized basis by about $12 million or $13 million. So that’s the sort of magnitude of the change we’re playing with on a yearly basis. The fact is as you point out, FX we do expect that the margin level in our prepared remarks we appointed to on the specialty side, not quite being quite as high as particularly in the second quarter of 2018, that is certainly a factor. There’s probably a bit of seasonality as well to be expected, not too much to your comment, but those are the main factors. And the fact that we do like to be relatively balanced in terms of our guidance, and not over rugged when we’ve got half a year still to go.

And then, Jack, maybe moving to the rubber side of the business, it sounds like the spot pricing initiatives that you put in place are having success. I was wondering, I know you have increases in North America and Europe, wondering, if you can give some color on - it sounds like those are going quite well. Remind us how - I know spot are very low in North America, maybe a little bigger in Europe, but how big are these spot business for you, and how much of an impact can that have in the back half of the year as those benefits? And also you mentioned some contracts are finalizing, so wondering if you can give some, I’m sure you can’t give too many specifics, but if there’s any read-throughs here from how well the spot pricing’s going, if there’s any read-throughs here, how we can think of contract pricing for next year?

Kevin, don’t want to overplay that spot issue too much, because I think probably, as much as anything it’s just an indication of what’s going on in the marketplace out there. As we’ve said in the past, our spot business is reasonably small. But there are a few pieces here and is there, and what it does is, is it gives you an indication of just how tight the industry really is. I mean, if you put a spot price out there, a little well over $100 a ton and you pick up a piece of spot business, whether it’s small or large in that case, admittedly it is small. And it’s small in both regions actually both Europe and the United States. It is an indication of the tightness. So I really call it out for that purpose as much anything. And moving to your second question about contracts, I’ve made the comments in the prepared remarks. I would just like to say that I don’t think I can go a whole lot further than what I went there, other than we are encouraged by what we see right now. It did, as we said earlier, start earlier than what we thought. In fact, some of the closures, they’ve occurred much earlier than we’ve seen in the past. I won’t comment on the extent of those, other than, they’ve come in more or less in line what we had expected going into 2019.

And last question, maybe just – comprehensive to look at that Korea consolidation. Wondering if you can update it, is that benefiting specialty volumes at this point, and I think you mentioned maybe the back of the year would see more. So what’s been the contribution there to specialty volumes if any so far in the first half of this year, how much of that add in the back half, and conversely on the rubber side, how much has that been a drag on the volumes, and what about the EBITDA contributions from that consolidation? Is that started to show up here in the first half of the year and what type of benefit should we see in the back half?

I’ll comment on some of the volume and commercial matters, and Charles could comment on some of the impacts associated with fixed costs and just the overall deal, which we were very, very pleased with. In fact as you know, and I think we called out, we added a line when we made this conversion. We closed that smaller plant, we made a total conversion of the southern plant, made. It's a lot more efficient, made it a lot more capable of taking on a wide variety of specialty grades, while adding a line that delivers highly specialized materials as well. That’s in the fill-out stage right now. So overall, quite pleased with that. We don’t go into that specific level of how much of that added and so forth in that particular region, but it certainly contributed to the overall growth because Asia Pacific is clearly a real growth area for us right now. So all-in-all, very good, I think I mentioned in my remarks that volumes had fallen in rubber in Asia Pacific, and of course that was planned. We were essentially giving up some of the lowest margin business that we had in that region. Had to because we took out over 40,000 tons of capacity, and the plan all along was to withdraw from roughly 40,000 tons of the lower margin business and preserve all of the rest of the business that we had. And I’m pleased to say that when you do a transition like that, sometimes something can fall off the plate on the way from here to there, and I’m very pleased to say that the team did a great job in making those transitions, and we were able to preserve the so-called good stuff, as we went forward.

Yes, until the fixed cost came in. It’ll probably be about $3 million and certainly no more than $4 million in the second half of this year pick up on the fixed cost to annualize, double it.

[Operator Instructions] Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Just a couple of questions; first just on the tax rate, what do you think is the normalized tax rates going forward, is it going to be 32 or can you do better than that?

I think for the remainder of this year, it’s going to be about 32. We might do a little bit better than that, Lawrence. And I think for a number of reasons, I do expect that our tax rate will come down from that more towards the 30% range, maybe in the longer term even beneath that, and the reasons for that are as we execute some strategies to take more advantage of the US tax rate in contrast to the rest of the countries that we deal with, that would certainly be a sensible thing for us to do. And that may be in tandem with the re-domiciling that I referred to in my prepared remarks. But to give you a feel, I think directionally an improvement in the tax rate, and we may we even be at 32% that we’ve signaled for this year, but we’ll have to wait and see.

And just to be clear it’s 32 for the year or it’s 32 for the back half of the year?

32 for the year.

And secondly on the IMO sensitivities or how this can play out, you mentioned that you are or you think you’ll be able to get your contracts adjusted to get a pass-through any volatility. Have you had to give anything up to get the right flexibility or is it just because the market and supply-demand balance is so tight that we should not worry about you getting caught on any of the contracts?

The fact is there’s a lot of certainty right now about IMO. As you can imagine, we spent a lot of time speaking with refiners, people that deal in this, some external consultants. Just to understand as best as we can, and we’ve come away with the belief that there’s just not really a settlement yet as to where this is going to go, except for the fact that generally speaking, directionally, high sulfur material is going to get cheap, low sulfur material is going to get more expensive. The direction we know, the magnitude is very difficult to understand right now. So we have to make sure that we’ve got the flexibility in these contracts, and literally probably starting mid-year, next year because that’s what’s signaled right now in terms of the spreads beginning to widen. We have to make sure that we’ve got those kinds of flexibility. But in order to nail it down precisely, becomes a bit harder. There are some indexes that are coming into play at the beginning of next year, but those indexes don’t exist right now, and we need to be able to watch those and see whether or not those represent a reasonable surrogate for our feedstock costs. But the fact is, it is a reasonable tight market, as we said before. Having said that it makes these discussions a bit easier, but the fact is, I think we as a company and the carbon black industry as a whole has attempted to make sure that at least in the Rubber business with the big tire customers, that there is the concept of pass-through, and so we get a lot of cooperation in the notion of pass-through. They just want to make sure that it’s transparent and that it’s fair, and that’s fine with us. But right now, the transparency does not yet exist in this situation. Only the direction of what we think is going to occur out there.

And then, just lastly, the tire volumes appear to have been weak, it seemed to be weaker than expected this summer, but your volumes have held up pretty well. Are you at all concerned about any form of an inventory build or is the delta explainable just by mix of changes in the tire market?

The supply chains move around quite a bit, Laurence, so sometimes these things are very dependent on sell-in and sell-out trends at distributors, and as part of a supply chain that we just don’t see. Our volumes have held up reasonably well, maybe just a little bit less in some locations, not for us at least in the US, but for the most part, we don’t really sense that slow down right now.

[Operator Instructions]. Our next question comes from the line of Mike Leithead with Barclays.

First on rubber black, can you just touch on where you think operating rates are globally in the industry, and how we should think about the pricing power on this business as things should continue to tighten over the next couple of years?

Well, we certainly have good visibility on our operating rates, and I can comment on those, and I can give you a general impression of where I think, the operating rates are for the industry. Europe, as we have said, maybe for the third or fourth quarter continues to be very full right now. The demand has been steady, the operating rates are high, our operating rates are plus 90% in Europe right now, and it’s our belief at least, that that’s same operating rate for the industry just given our feel of what happens when a particular supplier or whatever has a little bit of a problem. You can get a sense whether the business is full or the industry full or not. So having said that I would say Europe for us plus 90 and for the industry probably the same. Moving over to our main market, the United States, there’s a bit of maybe not quite a tie, but not quite as tie applies really to the category of the products. As you know, the two large parts of the rubber black market are the (inaudible) grade and the carcass grade or what we typically call hard and soft grades. From my perspective, right now, the hard grade is sold out and that’s the primary demand of the tire companies. They buy soft grades, but not at the level of the hard grades. But I would say right now (inaudible) grade for us are very, very high utilization rates, over 90%, and probably equal to that, I would say, in the industry. Soft grades, again, it’s speculative on our part. We’re probably in the higher 80s, and my guess is, that’s probably where the industry is as well. But maybe some grades of those, some of the…

And then going back to IMO 2020, you guys laid out some nice slides there. I guess some plants should benefit from cheaper high sulfur feedstock, others may be impacted by more expensive low sulfur feedstock. But, high levels for investors who aren’t as in the weeds as some of the nuances, based on the mix of high sulfur and low sulfur feedstock mix in your system, how should we think about these kind of offsetting themselves or if this regulation came into effect tomorrow, what would be the impact to your business based on your feedstock mix?

Yes, it’s a really good question. It’s one we’ve been examining as well. Public information exists out there about the feedstock limitations for different plants around the country. When we look at ours and we look at the industry, we don’t consider ourselves disadvantaged at all. We have what we consider fair degree of flexibility. So I think in terms of Orion, we’re okay, maybe a little bit better than average for the entire industry in United States.

And then just one quick final housekeeping one, when we should we expect GAAP financials to be released, and will we get three years of historical with that?

Most probably with our annual filing at the end of this year, latest, it just seems to be the most efficient way of doing it. I can tell you upfront that on our analysis to date, Mike, suggests very little impact on the reported results. Meaning that if we presented you with the, for example, year-to-date 2018 financial statements in US GAAP and US dollars, you would barely, if at all, notice any difference to what we presented today, and that’s the current plan.

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

You’re now up to 36% of your rubber black as technical rubber grades, is there a limit to what your plant can make? Can you go to 50%, and how easy it is to switch from tire grade blacks to technical rubber blacks?

It’s not that easy, John. We don’t have technical limitations that would prevent that. It becomes more of a matter of bringing the (inaudible) to that level and having them appreciate the value that premium product like that could provide. But to the technical rubber that we sell is actually outside of the tire industry, it’s in mechanical rubber goods area, where we have very good products and a lot of nice positions. There’s a lot of upgrading that can occur around the world, where you take people that are using inferior products or low-priced products. They have higher scrap rates and that type of thing, and if we can move them to our higher purity, more consistent material. But sometimes there’s a bit of a convincing that has to go on in that sense. But we’ve been able to do that, as you can see from this climb in technical rubber grades that we’ve been talking about for last several quarters. So our view is, we can move up to 50%, it’s just going to be a matter of time and how quickly we can get there. But it’s a major effort on our part if you can imagine.

[Operator Instructions] Our next question comes from the line of Connor Cloetingh with KeyBanc Capital Markets. Please proceed with your question.

So I was just wondering; it looks like in your specialty business, you’re able to get some good price increases just in a matter one to two quarters. And just looking sequentially from 1Q to 2Q with your margin improvement, how much of that you think it was the price increases, and how much of that was the FX benefit that you had talked about?

Well, it’s mostly price or actually just let me give you a little better bit of a feel.

And we’re talking sequentially, right?

You’re talking Connor Q1 of ‘18 and Q2 of ‘18?

Yes, sequentially.

Yes, yes.

Yes, it is very much the three quarters, if not more of that is not related to FX.

Okay, great. And so that should be pretty sustainable over time? Imagining --.

Yes, it should be. In the prepared remarks I did refer to the fact that, and I think Jack did as well, that the timing of some of our feedstock costs between Q2 and Q3 and Q4, means that we don’t necessarily expect to sustain the gross profit per ton margins that we’ve seen in Q2, as we move into Q3. They were [slightly] good, but not quite at that level, most probably.

And then I was just wondering if you had any thoughts or comments, now that we’ve seen some larger M&A in the carbon black industry. I know you’ve talked about the desire to do the smaller boltons, but is there any interest to participate in maybe larger M&A, as the industry appears to be moving towards some consolidation?

Of course, to the extent it makes sense. We have what we consider is a very, very good business as it is today, a sustainable business as it is today. But as we participate in these kinds of discussions about whether there are certain combinations, certain ways we can come together. Our focus has been, of course, on these smaller boltons, particularly in the specialty area. But we certainly would entertain and frankly have entertained in the past, opportunities to look at bigger opportunities like that. But that’s about all I would be willing to comment on.

Connor just let me correct something that I mentioned in the first part of your question. If you’re looking at, which your question was directed to, the shift from Q1 of ‘18 to Q2 of ’18, rather than Q2 of ‘18 to the corresponding quarter last year. The FX effect on specialty actually was slightly negative. It was actually a headwind. So if you look at the development of the margin on specialty, Q1 of ‘18 to Q2 of ‘18, it’s really very much a price driven story.

[Operator Instructions] Mr. Clem, it seems there are no further questions. I’d like to turn the floor back to you for any final comments.

Thank you very much, and we appreciate all of everybody’s interest today. I’m really proud of this second quarter performance and this first half performance. I think the business has performed well. We only have markets working for us right now, but moreover, I think the execution of the business to take advantage of those market conditions has been very good. It’s good to get this situation in Korea finally behind us. It provides a really nice platform for us in Asia Pacific, which is an area that we believe in, we’ll continue to grow in. And we look forward to the second half of the year, let’s just keep our fingers crossed, the markets hold up, but there’s not some of the issues associated with these trade wars and such that, that those subside, and that we can move along very nicely as we have so far this year. So with that, I’ll close and thank everybody for their attention. We appreciate it. Thank you.

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