Greetings. Welcome to the Orion Engineered Carbons First Quarter 2020 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded.I will now turn the conference over to Windy Wilson, Head of Investor Relations and Corporate Communications. Thank you. You may begin.

Thank you operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss our first quarter 2019 financial results.I'm Wendy Wilson, Head of Investor Relations and Corporate Communication. With us today are Corning Painter, Chief Executive Officer; and Lorin Crenshaw, Chief Financial Officer.We issued our earnings press release after the market closed yesterday and have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during the call.Before we begin, I would like to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties 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 8, and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations.Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.I will now turn the call over to Corning Painter.

Good morning everyone and thank you for joining us for our first quarter 2020 earnings conference call. Thank you Windy and once again welcome to Orion. Windy brings a wealth of investor relations and communications experience from the vantage point of several different firms over the course of her 25 year career. We are excited to have her joined the Orion team as a thought partner to Lorin and to me as well as a partner to each investor and analysts who is interested in understanding our fundaments and the strategies to drive shareholder value.First a big thank you to our people for their commitment and discipline during these challenging times. With their leadership and dedication we have been able to operate all of our plans through the quarter in excellent form including those in China, Korea, Italy, America; everywhere. Our people know their work is important and that our customers and investors count on us to deliver every day. Not only have our people been reporting to work but they have been disciplined. Across the work force of more than 1,400 people on five continents we have had no employee to employee contingent. In our plants at times when production slowed union and non-union colleagues have worked in the spirit of team work, trust and with great flexibility in terms of jobs descriptions.Together we are striving not just to get through this but to built a better Orion. We had an excellent Q1 until the second half of March when the impact of COVID-19 hit our European and American customers. on today's call, Lorin and I will cover the Q1 results as always but also devote time to three additional topics; our operational response to COVID-19, how we expect our business to develop from here and our liquidity which…

Thank you very much Corning. Now turning to Slide 8, volumes were down by 10.5% year-over-year and slightly up sequentially in line with the trends mentioned earlier, while adjusted EBITDA came in at $63.8 million, basic EPS at $0.30 and adjusted EPS at $0.44. Contribution margin per ton improved year-over-year due to positive customer mix and favorable feedstock cost development within specialty and base price increases within rubber.Cash from operations was $4.9 million with working capital up $38 million mainly due to higher sales and therefore accounts receivables which is a good thing on an underlying basis but will now reverse given the current economic conditions.For reference, during the fourth quarter working capital with a benefit of $51 million driven by lower accounts receivables given the seasonally weak sales levels we saw at that time. We expect working capital to result in a cash windfall of over $50 million during the current quarter due to lower oil prices and sales providing an offset to the expected significant sequential decline in adjusted EBITDA. Of course the ultimate size of the working capital benefit will depend on volume and price development through the balance of the quarter.Slide 9 explains the drivers behind contribution margin, adjusted EBITDA and net income in detail. Starting at the upper left-hand side contribution margin declined 3% year-over-year as the favorable impact of base price improvement across both the rubber and specialty segments and favorable mix and specialty was eroded by a combination of lower volumes and FX.From an adjusted EBITDA perspective lower contribution margin and higher fixed costs were partially offset by the favorable impact of FX on fixed costs and lower S&A during the quarter resulting in a decline of 1.1% to $63.8 million. The key driver of the decrease in S&A was lower compensation costs…

Thanks Lorin. Moving to Slide 17 as you know in March we withdrew our 2020 guidance in light of all the uncertainties caused by COVID-19. However, we want to provide some information that we believe will be helpful for investors in developing financials areas for the balance of the year. We're happy to answer any questions regarding any of the assumptions detailed on that slide. However, I'd like to use this time to discuss CapEx and the impact of oil on working capital and EBITDA.We have lowered our CapEx spending expectations from a range of $130 million to $150 million to $120 million to $130 million. This reduction reflects the reality that physical distancing mandates in connection with COVID-19 impact our ability to advance complex capital projects requiring heavy staffing whether they be growth orientated efforts such as expanding capacity at Ravenna or sustainability enhancing efforts such as the EPA mandated work at Ivanhoe.Regarding EPA orientated work we are committed to advancing these projects where possible while continuing to adhere to the physical distancing and safe work requirements of each state. I'm thrilled to confirm that we remain on track to complete the work at our Orange site in May advance of the June 30th deadline under the consent decree despite the challenges. I would like to congratulate the orange project team, the plant team and our contractors for working cooperatively and overcoming many obstacles to get us here.It helped that the Orange project was far enough along that we could finish the work without needing large numbers of contractors on site. However, at Ivanhoe we are in the construction phase and safety and physical distancing challenges have been more impactful. Of course if we can do more in Ivanhoe we will, upon receiving Force Majeure declarations for numerous suppliers…

Yes. [Operator Instructions] Our first question is from Joshua Spector with UBS. Please proceed.

Hey everyone. I'm glad to hear that everyone sounds well. So just to go into the oil sensitivity first I appreciate the updated disclosure and kind of reframing how you give that that's helpful. In your example you talked about a $30 decline in feedstocks 25 million to 35 million decline in EBITDA. Can you just talk about in a generic scenario how that impacts the different segments differently?

Okay. So first let me just say that I misspoke there. A $30 drop in it is times 0.7 you'd actually get to 21 or $21 million to $30 million for the actual impact on that so that's going to be an impact though that's going to hit us basically volumetrically as we use oil and notionally speaking that's going to then be just spread out evenly across the segments.

Then you would expect a larger impact in the rubber segment versus specialty or you'd expect it to be more even?

Yes. that number is a net of the favorable effects on specialty offset by the negative effects on rubber and so on balance its $20 million to $30 million but because the specialties business is less contracted it would benefit from lower prices for a period of time and so that is a net effect and so the specialties impact would be on balance favorable offset by the rubber and so that's lead.

Okay. Thanks and then just in terms of the April numbers that you provided within specialty I mean North America was showing down a lot more than Europe. Can you just comment on why that large difference if there's anything we should think about behind that?

Well I think part of what's been an element of specialty in North America has been oil patch activity much more so than Europe. So that would be an example of where things are different from the US and from Europe. I'd also say that there's a number of different economies in Europe and I don't think all of them have been impacted to the same extent the US is at this point.

Okay. Thanks.

Our next question is from Michael Leithead with Barclays. Please proceed.

Thanks guys and good morning and Wendy welcome to the team. I guess first I wanted to start with the EPA CapEx change. Three things on that. One, how does that change your 2021 expected spend for the project. Two, between this and the pandemic has that change your conversations with the EPA and three, does this change at all your calculus in your ongoing discussions with Evonik.

Okay. So let me take those not necessarily directly in order. So we are at this point giving out guidance for next year and what we're going to do on capital but obviously with a higher expenditure it's more of a burden into next year and to the sense that we end up shifting capital from this year let's say with Ivanhoe going slower into next year those are impacts or that rollover into 21 at the same time. In terms of Evonik it's really no change whatsoever. So we are clear on. There is ultimately a cap in the agreement that we have with them. We have never disclosed what that is. So we just continue business as is in terms of the EPA we have ongoing discussions with them around what the conditions are at both this side and at orange as well and I think that the situation with COVID-19 is so dynamic that I don't expect to get to like a definitive sort of revised timetable or something like that with the EPA right now. I'd say it's more a matter of keeping them informed with what we're doing and what we see on the ground.

Got it. Okay. And then I just want to say we appreciate the granularity you gave us on the April demand data. On the inventory impairment can you just help us with what you expect the impact to be in 2Q and is there expecting to be any drag beyond the second quarter from that?

The impact in 2Q could be on the order of it could be in the highs, it could be in the $5 million to $10 million range probably more like 10 million or so and could it last beyond that really depends on our inventory turns. When you buy raw materials based on a customer's order you assume a certain inventory turn. Our customers in many instances have abruptly reduced their orders and therefore will be sitting with that inventory for a little while longer than we anticipated. Could it last beyond the second quarter? It's possible but you can see an effect in the second quarter in the $10 million range.

Okay. Thank you guys.

Thank you Mike.

Our next question is from Kevin Hocevar with Northcoast Research. Please proceed.

Hey good morning everybody.

Good morning Kevin.

I am wondering if you could comment on how should we think of decremental margins here in the second quarter because obviously it seems like volumes are going to be down something fairly sharp and it seems like specialty will probably get some price near-term price cost-benefits. There's this inventory impairment to think about. Curious there's so many moving pieces I mean how should we think of the decremental margins here in the near term with all those pieces?

Hi Kevin. At a total company level I think you would start in the high 30s for contribution margin and that considers rubber being in the low to mid 30s and specialty in the mid 40s plus. I would not attempt to then inject extraordinary items into that. So I would start with that as a baseline and then later on the $10 million impact from impairment and I think that will be a reasonable approach to take versus changing the classic contribution margin to anticipate extraordinary effects.

Okay. That's really helpful. And then in terms of the volumes kind of weighed by geography the volumes you outlined in your slides for rubber and specialty. It seems like April was maybe down in the magnitude of 60% for rubber, 25% for specialty and could you give some color on what the order books look like? What do you expect as tire manufacturers start bringing capacity online? When the capacity comes back will it be a, do you expect a sharper improvement in terms of I guess less year-over-year declines but still meaningful or is it going to be very slow ramp and I'm especially side, it sounded like you expect things to get worse before they get better. So curious if you could elaborate on why you expect that to be the case on specialty?

Okay. So first let me say on rubber. It's a very dynamic situation and it is extraordinarily difficult to get a lot of visibility from our customers. So I think we just have to go into any questions that we're thinking around on that score. Personally I believe that the restarts will be slow and gradual starting with probably more activity on truck tires that kind of things slowly building into consumer tires. I think it's going to take some time to get their supply chains moving as well but that's my personal view on it.Based on our discussions I would say customers are really not able to give a lot of visibility to it. On specialty my view that it's going to get worse before it's going to get better it's just that I think we have to be realistic at times like this and not living on hope and taking the actions appropriate for the real situation on the ground. I think we're going to declare ourselves after the next quarter to be in a technical recession. I think we're going to see the impact of the unemployment rises that we've had and I think that's going to have to have a further impact on the broader economy. That's again a subjective opinion.

Okay. Great. Thank you very much.

Our next question is from Jeff Zekauskas with JP Morgan. Please proceed.

Thanks very much. In the course of the June quarter given the order decrements or the volume decrements that you're experiencing are you going to have to think about closing various plants that may have financial effects on you or can you continue to operate as you've been operating with this on/off structure?

Well so in the on/off structure we do have the ability to shut down reactors while continuing to ship and this is a product that customers tend to qualify certain grades, certain materials from certain plants. Does this support our customers? We really need to be able to continue to ship from all of our various sites. So I don't see the likelihood of full stop. South Africa's sort of a different situation because the government is taking a very hard policy towards just sort of shutting everything down but beyond like a specific situation like that I think we're likely to need to be able to continue to ship to support our customers and that's not a huge number of people. So I mean that that's a cost-effective thing to do.

Okay. Given the magnitude of volume decreases do you expect to report positive EBIT in June quarter.

We're just not going for any guidance at this point looking forward.

Okay and then lastly with the inventory write downs in the end are those cash effects because you're selling product where you built the inventory at a particular raw material price then the raw material price fell and then you have to sell it. So it eventually translates into a cash negativity. Is that correct or a negative margin on the thing you're selling?

Yes. That calculation is based off of the new anticipation of lower gross profit on that inventory and so in as much as we will have lower gross profits on the inventory in effect it's a profitability effect.

Yes.

That said though let me say that the spirit of our contracts is that we passed through oil costs and when demand goes down at the same time there is such a big shift in oil prices that expresses the mechanism that we have but we could here work with our customers on mechanism to achieve what the intent is behind these agreements and that's a very important priority to us.

[Operator Instructions] Our next question is from Laurence Alexander with Jefferies. Please proceed.

Good morning. Two questions. One, can you elaborate on the logistics friction that you alluded at in the beginning? And secondly on the oil sensitivities, how should we think about the path for fixing that? Is it going to be something that is addressed in the next upcoming contract negotiations or is it going to be sort of a motion year fixed?

Okay. Let me start with the logistics. Today there are quite a number of blank shippings in other words the ship in the end doesn't sail. They didn't have enough loading. They didn't put it on the water. There's also the challenges of ships ports not really functioning in certain parts of the world. India in particular right now. And containers building up at this certain location it's not getting clean, not getting stood up for returns.So all this just creates friction and difficulty in terms of restarting the economy and that's what I mean. I think and that goes into my comment earlier that I think in terms of the broader economy restarting there's going to be these things that have to be worked out before we get to the efficiency and let's say the fully lubricated global economy that we had before this whole thing started. And that's a broad comment I think as Orion we can manage that but just a little color to international logistics at this point.In terms of the contract school we always look for improvements in our contracts. We made a good move this last year on differentials and we'd look to and working with our customers an approach that is a fair and equitable way to handle oil.

Okay. Our next question is from Jonathan Tanwanteng with CJS Securities. Please proceed.

Hi good morning guys. I was wondering if you'd be able to disclose the average inventory or average price you pay for oil for barrel in Q1 and what's that kind of trended to in April so far? If you have any color there?

Yes. We can't share the average price that we paid in Q1 on oil but clearly over the past several weeks has continued to decline more recently it's bounced back but no we can't share that precisely no.

Okay. Is it fair to say that differentials you've been experiencing has been meaningfully decreased from last year since you've improved the contract terms?

Our differential pastures are working and they have diminished year-over-year as anticipated. That's right.

Well that best to say the differentials that show up in our P&L now different markets different places the actual differential in the marketplace is a different story necessarily but we've been able to pass that through.

Okay. Got it. And just from the cost reduction standpoint you can mention 10 million to 15 million in your press release in prepared remarks. Is that just over the three remaining quarters or is that an annualized number for the year and kind of what's the split between COGs and S&A?

That's an annualized number split about 70% compensation oriented and 30% discretionary. I would say 90% of it is S&A and only 10% cost of goods sold by and large because we're running in this agile mode in terms of our plants and the visibility from our customers is not very great. We are not including in that 10 million to 15 million substantial fixed cost reduction. We're managing it month to month, week to week in the agile mode that Corning indicated but it's going to largely be in S&A where you see that benefit over 12 months.

Got it. Okay and could you share with that kind of months to month expenses expense saving is on the outside of that 10 million to 15 million?

You see that really depends upon what the loading is on various plants and what the approach we take on that plant is and I'd like to leave that flexible so that when we go and we meet with a plant team, a union, a works council we can be in genuine discussions with them and haven't really sort of promised our way into a corner that there's a certain outcome we need to achieve in that. But clearly as I already said I mean we've had places where we've impacted people and taken costs down as a part of that.

Got it. Okay. The increased CapEx cost you're talking about for the EPA upgrades is that going to be spread out evenly over that time frame? Kind of help us with the phasing of that and --

Yes sorry. Some of that let's think about maybe a third of that is going to be in the cost to the Ivanhoe project and so that one is the cost that we'll see this year some of that coming in to next year at this point. The other one we'll have most of the income was actually our last project. So it'll be in the latter part of the overall timeframe.

Okay. Got it. And then in your discussions with the EPA right now I mean what are these things that are being discussed? Is it merely just passing all information? Is it two way street and the they acknowledge this as an issue? Just kind of give us a flavor as to as to how they're responding to the situation.

Well, because it's a bilateral discussion I'd like to not go into great detail but EPA put out a general letter which is public in which they basically said to everyone who had filed for Force Majeure or some sort of relief that basically they were instructing you to carry on as is for right now and I think that's a way to understand maybe the generic EPA approach.It's our job to get as much of this done as quickly as we can. It's their job to ensure that and yet there's just certain facts on the ground about the challenge of putting a large number of people in a relatively small space to try to do a lot of construction work. And I'd like to just leave it there and I don't want to put this one way or the other. We work that and you can imagine if I'm in their shoes I'm going to want to understand that you're continuing to do your best on it while at the same time understanding the situation on the ground.

And let me just add from a modeling perspective if you take the midpoint 250 by the end of 2020 we expect to have spent roughly half of the total 250. So then you've got 125-130 to spread over three years.

Got it. Okay thank you. And then finally just one regarding China. I know last quarter you disclosed a new customer they're kind of really pulling up your gross margins there and maybe the volumes a little bit/ I'm wondering if the relative strength there that you saw in the [indiscernible] was due to that one big contractor or was it more of a general I think that's improvement coming out of their lockdown after February that [indiscernible] that you saw?

Yes. I would say in general it's a broader story in China right now.

Got it. Thank you.

You are welcome.

[Operator Instructions] Our next question is from Christopher Kapsch with Loop Capital Markets. Please proceed.

Yes. Good morning. so thank you for the new sensitivities and focused on the one on oil. I get that guess estimation over a 12-month period but if you look at obviously that's unprecedented scenario we're all seeing right now, there is an abrupt nature in the price adjustment of oil from call it 60 to 24 whatever in the first quarter alone but during the first quarter if I understood you correctly your gross profits were actually flatfish or maybe even up sequentially. So just to sort to understand that is that just a FIFO sort of accounting benefit there and then I guess would you feel the brunt of that full-year sensitivity in the second quarter given how just abrupt the change in the feedstock cost work? If you can provide any color on that?

Yes. So we buy on a rolling average basis and so of course we're all watching oil prices and we've done analysis that suggests that Brent by the way is the better one to look at probably a 90% correlation with what we actually buy but because we're buying on a average monthly basis looking backwards there tends to be a bit of a lag effect and we don't have the volatility that you would expect just looking at a screen at the day-to-day prices. No, when you think about that rubric it is calculated based off of volume over a 12-month period of time. So if you then want to look at a particular quarter you would look at it on a pro rata basis.

But no wouldn't accelerate it because of recent activity because the rubric is based off of volumes over 12 months and so that's the best way I can explain it.

Okay but so in the first quarter though there was despite the look sharply lower oil prices you didn't see any degradation in gross profit really. So is that just a near-term cost accounting dynamic?

Yes. So in the first quarter if we just look back to what we budgeted again there's a lag effect. In January, February based off of the feedstock that we buy it was actually flattish if you look at January, February and it was March where you saw a large year decline. So the first quarter did not see a dramatic reduction. When you look at the weighted average cost of what we actually buy it was more muted until later in the quarter. So I think you'll see more of that in the second quarter.

Right. Okay. And then on the higher EPA CapEx spending can you just, if you have intelligence on this is your sense that the entire industry is incurring these sort of and I don't really want to characterize them as cost overruns but higher than expected capital expenditures on these projects and the reason I'm asking because clearly part of the commercial conversation you've had with your customers was in terms of the industry and needing deserving an adequate return on these necessary capital expenditures. So just wondering if you have a sense for is it something unique about your facilities that [indiscernible] you're incurring these higher expenditures or is it just the more nature of the remediation efforts in a general sense? Thank you.

Yes. thank you Chris. Maybe the easiest and most objective way to answer that is we have one other public competitor US company who's in this same situation that we are and from their filings that we've been able to see we've seen that their costs have gone up considerably from where they originally estimated them as well. So I think in that sense not that we all would brought it I would presume that we're all looking at trying to get a return on a larger number at this point. That said we all make our own pricing decisions and there's no discussions around that.

So we have any further questions?

No. That's it for now. Thanks. Catch up with you guys later.

Okay. Thanks a lot Chris.

We have reached the end of our question-and-answer session. I would now like to turn the call back over to Corning for closing remarks.

Well thank you all for making your time to be with us today. We appreciate it and we appreciate your interest and support for Orion in these very challenging times. I wish you all to remain keeping physically distant and keeping yourself safe and we look forward to following up with you. Thank you very much.

Thank you. This does today's conference. You may disconnect your lines at this time and have a wonderful day.