Good morning ladies and gentlemen and thank you for standing by. Welcome to the Orion Engineered Carbons Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Wendy 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 second quarter 2020 financial results. I am Wendy Wilson, Head of Investor Relations and Corporate Communications. 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'd 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 this call. In addition, all forward-looking statements are made as of today, August 5th, 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 most directly comparable GAAP measures in the table attached to our press release. I will now turn the call over to Corning Painter.

Thank you, Wendy, and good morning, everyone, and welcome to our second quarter earnings conference call. I don't want to let this moment pass without thanking our people for their dedication and flexibility during turbulent times. They have worked diligently and with great agility to ensure that both safety and production priorities were met. Thank you. I'd also like to congratulate the people who upgraded the air emission controls at our Orange, Texas plant. This project was executed on time despite the pandemic and associated physical distancing requirements necessary to work safely. The impact of this project is a reduction in the site's NOx emissions by 2,300 metric tons per year. The dedication of our people and the magnitude of this investment demonstrate our commitment to sustainability and to being a good community citizen. On today's call, Lorin and I will cover the second quarter results, as always, but also devote time to two additional topics: our operational response to COVID-19 so far, and select leading indicators of recovery in our business. As always, we'll be happy to take your questions at the conclusion of our comments. Turning to Slide 3. Second quarter demand for Carbon Black was dramatically impacted by the pandemic. Throughout the crisis, we focused on protecting Orion's employees and production capability, ensuring supply chain stability, enhancing our financial standing and supporting our customers' needs as they ramp up their production. Each month, since April, we saw Rubber Carbon Black demand improved sequentially across all geographies. This trend continued into July. We believe our Rubber Carbon Black business will continue to be one of the first economic sectors to respond to improvements in the broader situation. From a financial perspective, we reported adjusted EBITDA of $15.2 million and generated $85.7 million in operating cash flow despite Orion's…

Thank you very much, Corning. Now turning to Slide 8, volumes were down 42% year-over-year and 33% sequentially, with lower demand in both segments and in all regions. Notably, the absolute volume level we experienced was roughly 15% to 20% worse than the worst quarter of 2008, the last major economic downturn. Against this backdrop, adjusted EBITDA was $15.2 million, basic EPS came in at negative $0.30 per share and adjusted EPS was negative $0.14 per share. Contribution margin declined 48.2% year-over-year, primarily driven by lower volume, partly offset by base price increases in rubber. As Corning indicated, cash flow was a highlight for the quarter, despite facing a tough environment, with an exceptional $77.3 million working capital reduction, in line with the levels that we expressed on the first quarter call, driving operating cash flow of $85.7 million and free cash flow of $53 million, as defined as adjusted EBITDA minus CapEx, minus the change in working capital. Slide 9 explains the drivers behind contribution margin, adjusted EBITDA and net income in greater detail. Starting at the upper left-hand side, contribution margin declined 48% year-over-year, as lower volume and the impact of lower oil prices on margin offset base price improvement in both segments and favorable mix in Specialty. During the last call, we shared that decremental margins in the range of 30% to 35% for Rubber and in the mid-40s for Specialty, were good forecasting proxies during the current downturn and this proved to be the case, excluding the contribution to lower revenue related to FX and simply passing through lower feedstock cost. Adjusted EBITDA fell 79% year-over-year to $15.2 million, reflecting the steep drop in contribution margin. Notably, cost reductions of around $10 million cushioned the impact somewhat, of which roughly two-thirds were manufacturing-related, showing up in…

Thanks, Lorin. Moving to Slide 16. As you know, in March, we withdrew our 2020 guidance. However, we continue to provide insights and sensitivities on the drivers that we believe will be helpful to investors in developing financial scenarios for the balance of the year. We are happy to answer any questions regarding these assumptions detailed on this slide. At this point, I'd like to share an update on our CapEx outlook. We are returning our 2020 capital forecast to the $140 million to $145 million range. Last quarter, we lowered our projected CapEx spend for the year by about $15 million, anticipating that physical distancing mandates would require us to slow work on complex projects requiring heavy staffing, which it did. However, there are several smaller safety, reliability and productivity-related projects that we were able to advance safely, often taking advantage of demand-related downtime. These projects will strengthen our asset base and position us to emerge stronger from this downturn. During our last call, we estimated that the cost of the U.S. air quality investments would be $250 million, plus or minus 8%. At that time, I indicated that we were proceeding towards a stage-two front-end loading or FEL2 quality design estimate for the final two plants and that upon completion, it would represent the most robust cost estimate we have had to-date. Just as background, an FEL is a body of work conducted early in a project when it's easier and more cost-effective to make design changes. Doing this work does add cost, but it sets the project up for ultimate success. Front-end loading activities fall into three stages, FEL1, 2 and 3. FEL2 is developed up to a predefined level of detail. Not yet sufficient for construction and operation, but enough to develop a cost estimate, a…

[Operator Instructions] Our first question is from Josh Spector with UBS.

Yes. Hey guys. Good morning. Thanks for taking my questions. Just on the comments on July trends and potential restocking being a factor in North America and Europe, is there any way for us to get a feel for how much that could be impacting trends near-term, either by looking at maybe June versus July trends? Or if you have any feel on maybe replacement tire market takeaway trends from retail outlets? Anything that might help us frame that?

Unfortunately, we don't have the ability to be very precise on that and in fact, when we talk to our customers, I think people are very transparent and trying to help each other work through it. I would say they see pretty volatile conditions themselves. So just as a – I would say, just as a general caution that statement versus that we have a lot of insight to exactly what's happening from a restocking point of view.

Can you share where volumes were down in June versus July?

I'll say this that July was a significant increase from June, I think beyond that is commercially sensitive.

Okay. And then, just on pricing in Specialty carbons. I mean I think pricing was only down a few percent, which is kind of surprisingly small given the move in energy and feedstock prices. Just trying to think about how you expect that to unfold, maybe over the next couple months. Do you expect any further pricing declines? Is that a lag? Or do you expect to hold pricing better now than perhaps you did in prior cycles?

So, and you are speaking specifically around Specialty, yes?

Yes, specifically on Specialty.

Okay. So if you were going to look at our slides where break out the major backdrop on that, the EBITDA walk. It show we are actually a positive there. That's more on mix. I think that all in all, given my goodness, all the changes in demand and the disruptions in the market, Specialty pricing has proven to be really quite resilient going through this and I expect that to continue to hold up.

Okay. Thank you.

[Operator Instructions] Our next question is from Jon Tanwanteng with CJS Securities.

Good morning gentlemen. Thank you for taking my questions and very nice quarter, all things considered.

Thank you, Jon.

Thanks, Jon.

My first question is, just on the working capital drawdown in the quarter and the tailwind from the energy prices. Are you expecting to keep that for the foreseeable future? Or if you are expecting some sort of reversal, to what extent would we see that in the next quarter or two?

Yes. So our balance sheet reprices on about a 60 to 90-day basis. I'd say 60 to 90 because our inventory turned pretty slow in the second quarter. As we look forward, it all depends on your view on oil prices. If they hang out here in say, the mid-40s, then we'd actually expect to invest in working capital in the third quarter because our expectation is that volumes will be stronger in the third quarter. And so, it all depends on where oil prices go, but on an oil price-neutral basis, we'd expect to invest in working capital, because we expect volumes to be stronger.

Got it. That makes sense. And then, Lorin, how should we think of incremental margins heading into a recovery out of the trough given that you are layering in all these ongoing costs and efficiency efforts?

Yes. I think that the proxy we shared, that 30% to 35% on Rubber and mid-40s on Specialty, works on the downside and it works on the upside. I would caution you on the quarter, we were thrilled to see the fixed cost reduction, but some of those cost reductions related to, say, reversing bonus accruals and capitalizing labor in a slow time, those will not persist. And so, we beat expectations, I think, on the decremental margins. But I would encourage you to stick with that 30% to 35% and mid-40s and that will serve us well on the upside.

Okay. Got it. And then, just a little more color on the commentary regarding July possibly being the strongest month from Corning. Can you get into a little bit more detail regarding what insights drove that commentary? Either what you are seeing at customer inventory levels, whether it's some kind of sell-through data or maybe expectations of less or more seasonal downtime at your clients, what have you?

Right. So, as one thing is just as we look forward for how we see our order book, I'd say, we see stability rather than increasing volumes. So I think just our kind of read of actual movements on the ground would just say, certainly, the pace of the recovery, I think, may pause. I think also you can look at supplemental unemployment insurance in the U.S. now being cut back. You can look at the spread of COVID-19 in many geographies and just realize that those are things that are going to be a headwind for the global economy, and we are going to be a part of that. So it's more statements around macro things than any specific insight around inventory levels around specific customers. That's our read of what's happening versus really high-quality information being shared.

Got it. That makes sense. Thank you very much.

[Operator Instructions] Our next question is from Mike Leithead with Barclays.

Mike?

Hello. Sorry.

Yes. We hear you now.

First two questions on CapEx. The increase in this year's CapEx, were those projects pulled forward from 2021 or just additional maintenance that you are doing because you had downtime? And second, the EPA project, that $135 million remaining, how should we think about that phasing roughly as we think through the next couple of years?

Okay. So I'd say it was a mix of some projects that were slated for next year, also a mix of some projects that we knew we needed to do. It will require a total site outage and we hadn't really scheduled in a time when we were going to do that. So we took advantage of the outages that we had to pull those forward, as well as have allowed us to work with our teams and our unions to come forward with kind of a win-win approach as we work through this difficult time. Looking forward on the EPA, roughly speaking, next year, I'd say about $65 million, then $50 million then, let's say, $20 million.

Got it. Okay. And then just as we think about pricing into next year, obviously, you've been very clear about your philosophy around reinvestment economics, but you will probably end the year at a lower volume than last year. So, how do you think about kind of those dynamics heading into next year, obviously, trying to push price versus maybe a weaker demand backdrop?

Well, I think, first of all, the key thing is, we are pricing for 2021, not 2020. And I think you can look at the size of that rebound that we reported in Rubber Carbon Black and say, I think 2-21 is going to be a great year. If you look at 2010, coming out of 2009, for the industry, it was a great year and beyond that, I'd say the underlying factors that drive it, particularly in North America around on sourcing of tire production, but the absolute absence of new Carbon Black factories going in, that just sets this up and against that, we have the backdrop of the latest trade friction, the U.S. moving towards implementing new tariffs on tires. I think all that sets it up for another successful year.

Okay. Thank you.

[Operator Instructions] Our next question is from Josh Spector from UBS.

Hey guys. Thanks for letting me get in again. I was just curious, [Indiscernible] by the impact of the inventory revaluation in the quarter and any comments on what you expect for that next quarter, if anything?

Josh, I think I got your question. You broke up a little bit. Like – would you just repeat it, please?

Sorry about that. Just trying to quantify the inventory revaluation in the quarter.

Sure. So, the impact on the revaluation was only about $5 million, less than we expected coming into the quarter. The oil price rally over the last 45 days of the quarter was very helpful. And so, it was about $5 million. And no, we don't expect, absent some sharp precipitous decline in oil prices or something of that sort, any carryover impact, that should be behind us at this point.

Okay. Thanks. And just on the raw materials side, I mean, in earlier comments, you said you have all raw materials secured. But I was curious if you could comment on any constraints in the quarter given the volatility in refining and chemicals markets. Was there any issue perhaps sourcing the exact material that you normally get? Is there any advantage or disadvantage from a cost perspective that would flow through over the next couple quarters that we should consider?

In general, I'd say, no. We had stability in our supplies and that would probably also turn over to the commercial situation. There is always a few opportunities one way or the other, but nothing out of the ordinary. I think it just reflects the overall stability of the business model that really just was not an issue for us.

Okay. Thanks. And I'll maybe try one more, just a higher level question. In a scenario where trends in July become kind of the steady state over the next year. Is there anything that you would do differently from a production or operations standpoint to position yourself for that? Or would it just be keeping some of the temporary cost out longer? Just thinking in a longer-term scenario, would you actually reposition or do anything really different?

Yes. So, I think the question is really, would we change our production footprint, that kind of thing. And you could be in a situation where in a given facility, might you idle a reactor? That's totally possible. But when you consider the distribution costs and the advantage of location and the fact that our reactors are different and making different grades, I think we'd be very unlikely to close a facility driven by market conditions at current levels.

Got it. Thank you.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Corning Painter for closing remarks.

Hello, everyone. Thank you one more time for joining us today in this different time slot that we selected for this week. We appreciate your interest in the company and appreciate your time. Have a good day.

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