Greetings. Welcome to Orion Engineered Carbons Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . Please note this conference is being recorded. At this time, I hand the conference over to Wendy Wilson, Head of Investor Relations and Corporate Communications. Wendy, you may begin.

Thank you, operator. Good morning everyone and welcome to Orion Engineered Carbons conference call to discuss our fourth quarter and full-year 2021 financial results. I'm Wendy Wilson, Head of Investor Relations. With us today are Corning Painter, Chief Executive Officer, and Bob Hrivnak, our Interim Chief Financial Officer. We issued our press release after the market close yesterday and we 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 and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, February 18. The company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. All 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. With that, I will turn the call over to Corning Painter.

Thank you, Wendy. Good morning, everyone. And welcome to our earnings conference call. In 2021, we executed an excellent recovery in our business from the previous year, with increased demand for our higher margin businesses. Full-year adjusted EBITDA was $268.4 million, a year-over-year increase of 34.2% and our second highest ever, with Specialty representing about 55% of it. As expected, fourth quarter results were weaker versus last year, reflecting the Ivanhoe startup and a large number of turnarounds which limited our ability to take advantage of market conditions, coupled with the global supply chain challenges impacting some customers, as well as higher raw material and logistics costs. Specifically, fourth quarter adjusted EBITDA was $52.3 million, down 20.8% from the fourth quarter of 2020. Beyond delivering solid financial results in 2021, I'm very proud that the team successfully executed on several key initiatives. We reinstated our dividend with an interim payment on January 12, 2022. We completed and commissioned our extensive air emissions control work at our Ivanhoe site. We also completed and commissioned a new reactor line in Ravenna. Finally, we achieved several important product qualifications. A big congratulations to the team on these milestones, which set us up for future success. We have two more air emissions upgrades to complete in the US. I can assure you that they should not be as difficult as the Ivanhoe project was, as we've entered into lump sum turnkey EPC contracts using more traditional technology for both of the remaining sites, significantly derisking those projects. We are determined to recover the higher operating costs associated with these control projects and to achieve an adequate return on the invested capital. In Ravenna, we started shipping qualification samples to our customers. As we work with our customers through the qualification process, we expect aggressive…

Thanks, Corning. Revenue increased 24.4% year-over-year, primarily reflecting the impact of passing through higher feedstock costs, partially offset by lower volume, impact of unfavorable product mix and foreign currency translation. Contribution margin decreased 9.9% year-over-year, mainly due to higher energy and shipping costs, lower volume, unfavorable product mix and foreign currency translation. Adjusted EBITDA decreased 20.8% year-over-year, reflecting lower volume, unfavorable product mix and higher fixed cost attributed to a heavy quarter for turnarounds. For 2022, our expectation is that we will have considerably fewer downtime hours versus last year. Finally, we reported adjusted net income for the quarter of $10.7 million, down approximately 55.4%. year-over-year on lower adjusted EBITDA. While we mentioned in our past two calls that the end of the year would be relatively weak to the remainder of the year, we do expect 2022 to be a strong year. The factors affecting our fourth quarter will not persist. On slide 7, you will find several useful bridges that provide greater financial details supporting the comments I just shared on our quarterly results. On slide 8, you can see that we are providing an additional guidance matrix in 2022. Based on our forecast, we expect 2022 adjusted EPS to fall within a range of $1.90 per share to $2.20 per share, up over 18% from 2021, building upon the positive trend we experienced last year and the confidence we have in our future financial performance. Slide 9 details our year-to-date cash generation, which is essentially flat with the favorable impact of strong financial performance and receipt of the Evonik settlement proceeds, largely offset by the net working capital increase of $98 million and EPA-related investments. Most of the increase in net working capital was attributed to higher oil prices. As a reminder, when oil prices rise, our…

Back in early 2020, we set the goal to take action during the pandemic, so that we would emerge stronger from it. Well, the pandemic may not be over yet, but I believe we have emerged stronger. I believe 2022 will be an excellent year for us, driven by all the things that we've done, the outcome of the pricing cycle and a general supply/demand imbalance in our markets. For example, global utilization rates are projected to be roughly 300 basis points higher in 2022 versus 2019 according to Notch Consulting. Our full-year adjusted EBITDA guidance is $300 million to $325 million, up over 16% at the midpoint. We're establishing adjusted EPS guidance for 2022 with a range of $1.90 to $2.20 per share, an increase of over 18% above 2021 EPS. In developing these ranges, we've used the current Brent price and foreign exchange rates projected out for the year. Capital spending is estimated to be in the range of $225 million to $240 million, anticipating the kickoff of a kappa acetylene project this year. We have approximately $90 million of US air emission control spending remaining, with about $70 million of that being spent in 2022. As far as compliance-related capital expenditures are concerned, 2022 represents an important inflection point for us, as this spending will be dramatically reduced in 2023, allowing us to focus on completing previously announced projects and new initiatives. In closing, there are four key points I would like to reiterate. First, we're going to build off our excellent 2021 performance by continuing to realize improved pricing, loading Ravenna, making improvements in our North America Specialty business and leveraging new product game. Second, we're excited to be laying the foundation to deliver higher earnings power. As we approach the next five years, we expect to have the wind at our back from a discretionary cash flow perspective, with net leverage in line with targeted levels and our emission control investments coming to an end. We have about 70% of the projected air emission control spending behind us at this time, with only about $91 million to go and have compelling growth opportunities ahead of us. Third, while we've highlighted the Ravenna expansion and Huaibei in recent quarters, as one of a handful of producers capable of using acetylene, we see significant growth opportunities for kappa conductive carbons. These materials are an important conductive additive in modern lithium ion batteries and other attractive markets. Going forward, we will share more about our plans to make this attractive near adjacency a more substantial contributor and growth driver. Fourth, we're anticipating a strong year in 2022 with EBITDA midpoint guidance results up over 16% and our adjusted EPS of over 18%. And with that, operator, please open the line for questions.

.

Okay, we're going to start out a little differently this time. We're going to start out with a question from an investor. We got our email in overnight and they were willing to let us share it with the whole call. And the question was, could you tell me more about your capital spending plans and returns? I thought this was an excellent question. That's one of the reasons why I wanted to take it. And as I've said several times, capital allocation, after safety, it is the most important question or issue for a CEO and for a board. And this is a very frequent board topic here at Orion. And second point I'd make is from the day I joined this industry, I have hammered that we need to stop thinking about margins, stop thinking about incremental improvement and think about return on invested capital, that that's how the world works. And that is a big opportunity for this industry. So let's go through our numbers. We have about $70 million for air emissions work this year. And let me be clear, I am determined to get a return on that investment. Last year, early in the pricing cycle for 2022, I met with the US sales team. I had a slide up there, just had one number on it, our capital investment. And I made the point, look, we are going to get a return on that. And you will see that in our EBITDA per ton for Rubber this coming year. Next up, we have about $65 million to $70 million in our run rate for sustaining capital. You should expect us at this point to be at the upper end of that range just given the high loading or the improved loading we see in…

The next question is from the line of Josh Spector with UBS.

Thanks for those details on the CapEx side. It's certainly helpful. I guess maybe bringing it back near term, just looking at your 2022 guidance, curious if you can give us some context of what you're baking in in terms of contract negotiation benefits from Western tire companies, what the price benefit you're baking in from that. Also, just in regards to your 4Q results and the turnaround in Ivanhoe startup, you mentioned you have two more emission startups to go. Is there any lower costs year-over-year in 2022? Or do we think about cost impacts similar to what we saw on 4Q as those additional facilities start over the next year-and-a-half?

Two questions there. Number one, about, let's say, what should we expect from other air emissions and the first one on the pricing cycle. So the pricing cycle, as I indicated before, very positive. You'll see in our global EBITDA per ton, let's say, low 300s range of where that profitability is going to come in, we do not provide greater clarity like by region, what we achieve, because it's just commercially sensitive and different customers have slightly different outcomes and so forth. If we then go to EPA and looking forward, I think the big issue is it's not just the cost in the fourth quarter that was an impact for us, it was just the amount of downtime and the challenge of bringing that unit online, right? We were the first ones to commission this kind of technology in the carbon black industry, and it was challenging. Looking forward to our next project, we're going to be using a much more traditional a dry scrubber technology for the SOx abatement. And I think it's just going to be a much easier and more straightforward startup for us in that regard. I would also say that we've contracted out really EPCC, so engineer, procure, construct, but also commissioning in the scope for the remaining two projects. And that certainly derisks them as well. So, I think it'll be a simpler startup, a quicker startup, but also a less costly startup.

I guess just on the Rubber Black volumes, a big kind of stubborn for you guys through the year, down about 10% versus 2019 and kind of consistent at that level through the year. I know 4Q, we mentioned some discrete items. But just wondering, is that reflecting a price-over-volume strategy that we should expect to persist over the next year? And I know you just mentioned some brownfield expansions, talked about market growth. How do you think volumes really develop the Rubber Black side of the business over the next year?

I think the market is tightening. And I made the comments earlier about just the view of independent data reflecting higher industry loading. And we'll see that as well. We'll have higher loading next year. Specific to the fourth quarter, demand was very strong in the fourth quarter, and we just were not able to participate in that upside. And in truth, for this quarter right now, we're in a position of rebuilding our safety stock. There's a lot of requests for spot volumes right now, which we turn down. Our commitment is to our contract customers, and that commitment means, in addition to simply supplying them, also rebuilding what we consider our safety stock levels, so that we can be assured of being reliable to them, rather than trying to capture every spot opportunity that's out there. So, I think the market is robust, and we're going to have higher loading this year and also higher pricing. And that's, of course, the direction you want to go.

Our next question comes from the line of Mike Leithead with Barclays.

Corning, if I return to your answer to the investor question. I just want to make sure I got it. So, for CapEx this year, I think, broad buckets, 70-ish million for maintenance, 70-ish million for EPA, which would lead to $85 million to $100 million for kind of growth projects, is that correct?

Correct. I'm including the innovation in that growth, but yes.

Second one on CapEx. I might have missed it, but is the cumulative EPA cost still in that $270 million to $290 million range or has that moved higher?

I think at this point, we're at the upper end of that range, just based on all the startup issues and challenges there. But, yes, basically.

Lastly, just as we think about 2022 earnings, you've mentioned there's a bunch of moving parts in terms of the macro, supply chain, you're rebuilding some inventory this quarter, just how should we think about the cadence of earnings in 2022?

We think they're going to be relatively stable through the course of the year. There's still going to be Q4. Christmas is still going to come. You're still going to have those kinds of impacts. But as we look at it, we expect pretty good loading all the way through. We'd, obviously, be in a position, as I said earlier, to take care of more spots, sort of icing. But at the same time, we also have higher just baseload contracted volumes for this year. There's a little bit less availability on our part anyway.

The next question is from the line of Chris Kapsch with Loop Capital Markets.

Following up on the discussion around contract negotiations, and I totally appreciate the sensitivity and keeping those comments purposely vague, but just curious if you could provide a little bit more color, maybe qualitatively characterizing those discussions? Because you mentioned, you do expect higher loadings this year? So I'm wondering if that's a function of just the stronger market? Or did Orion pick up some share in those contract negotiations? And then, just the nature of the negotiation with customers, how much pushback have you gotten from price increase initiatives? Your focus on being entitled, understandably, to return on capital, does that resonate with these and with these buyers and with these customers? And how often did security of supply come up in these discussions?

First of all, let me make my comments around South America, North America and Europe because that's really where most of that action was, some for Africa as well for us. I would say, in general, there was a concern from tire companies, there was greater interest in just simply securing their supply. And I think that makes sense. When you think about all the challenges in the supply chain right now – reliability, getting the supply – that was very key. So we did not really have to back off our goals on getting to what I consider to be fair pricing. We had a marketplace that I just think was conductive to that. And we look to make improvements really in just about all those market situations. It's been widely reported that there's going to be some capacity in the industry that may not do the upgrade for the EPA work. That's for somebody else to confirm. But that's out there, and I think that just reflects the natural and logical consequences of when pricing doesn't support investment for a long period of time. And I think reality is obviously another thing that moves this forward. So, we remain committed to getting a fair price, to improving our returns, to getting return on all that invested capital for all this EPA work. I think that's essential for the health of this industry and good for the entire supply chain. And I would say this year, it was a little bit more like pushing on an open door.

I know you don't want to provide much specificity around the investment for the acetylene black, but just wondering the confidence you have in terms of your addressing that market to underwrite a capital investment. And it's obviously a dynamic space and the market is growing? No, Albemarle, the biggest lithium company, talked about the EV demand for lithium, they raised their forecasts substantially through 2025. So, the CAGR for the industry is, call it, 30%, give or take, as far as the eye can see. So, you're building a plant that's going to feed into a market that's growing. So just wondering, do you anticipate a certain market share for your role in supplying conductive carbons? Do you have specifications for a certain mix of customers at this point? What's underwriting that investment? And then, how do you think about in terms of the fact that you're going to be participating in a market that has that growth trajectory?

Excellent question. First of all, it is a dynamic and a growing market, but it's a market also that's just really in shortage, I would say, around conductive carbons right now. We could sell the entire capacity of our plant multiple times over. There's a number of different conductive carbons that go into lithium ion batteries. And the reality is, as we see it, the batteries perform better with a mix of different types of carbons that go in there. So, we're really focused on one type of ultra-high purity conductive, kappa acetylene based product. Our view is we could grow capacity 5, 10 times from where we are now, and we would be able to sell that out over a course of years. Yes, every new plant, you'd have to go through a qualification process. But as we are qualified with our current facility, we're highly confident of that. I think one of the advantages of our space within conductive is that while, for some other materials, like carbon nanotubes, the technology forward is actually fairly broad. And there's a number of people who play in that space. For this kind of material, the additive we're making for those electrodes, to some degree, there's a natural limit. It's, A, the ability to have the technology to do the conversion. But number two, you need access to large quantities of acetylene. And I think that's something that helps make this an attractive market even with all the excitement around it today. So, we see that as a big opportunity for where we are. We're qualified. We are just absolutely limited by capacity at this point.

And just as a follow up to that, are you at a point where you would take a stab at sort of identifying the TAM, whether it's the acetylene portion of that market or something broader and where you think you are at this point in terms of gaining market share based on the customer engagement that you have?

I think for our perspective, when we're able to announce, and with that, we're going to be able to announce the amount of acetylene, like the scale of what these projects are, and I think that's a different way of thinking about it versus share. Because, again, in the battery composition, you've got different forms of conductive carbons. I think this is a highly desirable form of conductive carbon for it. And really, our limitation, I think, is less around what does that mean in terms of your relative share, it's really a performance sale around this. I think the limitation is going to be access to acetylene and the ability to just manufacture the material.

. The next question is from the line of Jon Tanwanteng with CJS Securities.

My first one is, is there any inflation risk in your CapEx at all as you're looking at today? I know you mentioned that they're more turnkey projects on a more proven technology, what's open ended at this point and kind of how are you accounting for that?

The kappa projects that would be greenfield, right, so those are not kicked off at this point. So, definitely, right, there's some inflation risk until you nail that down. I'd say it's very limited at this point for the project in Huaibei as we're in the field and most of the major equipment has been purchased. Obviously, inflation has been a challenge. But we've been able to manage that and keep that on budget thus far. With the two remaining EPA projects, because we've got lump sum, turnkey EPCC contracts, it's significantly derisked. I wouldn't say zero, especially when you go out to the second project. So not zero, but derisks pretty considerably. And then finally, on those debottlenecking projects, so that's things that we're moving very fast and come together on. So, I think our cost estimates for that already reflect today's inflation.

I was just wondering if you could just help add a little more color just to the energy risk in Europe. I know that you have a relationship to crude oil that's a little bit inverse of what most people have. I'm just wondering if you can quantify what happens if energy crisis due to maybe conflict or some other issues just completely out of control? What is your exposure to that specifically?

Let me talk to that in maybe three levels. So number one, you just mentioned the conflict. And I think that's kind of an elephant in the room for the world today and for the investment space. And just to say, so we all recognize, if something bad happens in the Ukraine, like the impact to us pales in significance to the human side of that. Specifically for Europe, there's a lot of products, a lot of carbon black imported from Russia today. I think in that kind of a scenario, all bets are off, and I think there would be a very challenging and dynamic cycle. To be clear, with the available capacity we have, we would support people who are interested in making a strategic realignment with what their supply chain is. I have zero interest in bailing people out on a short term basis for supply chain, just choices that they've made. In terms of natural gas, and oil prices, that's all in our guidance, right, and it's all there, baked in, as I said, basically projecting out current rates. For oil, that moves with our contracts, as we've described in the past. So, a $10 barrel increase in the oil price over the course of the year is about $7 million to $10 million of additional EBITDA for us. I say over the course of the year, because depending on how fast that moves, it may take a while to catch up, that kind of things around. But by and large, you're right, that's an unusual situation, that's a positive for us. We also have natural gas that we buy. Some of our natural gas is passed through in contract, some of it isn't. It's obviously a commercial priority for us to even strengthen the position that we have in that space. But where we don't, obviously, that's just another area where you have to go out and push pricing on it. Does that help?

It does, Corning. If I could squeeze one more in there. I was wondering if you could touch on the hire of Jeff Glajch from Graham and kind of what made him that candidate and what was you tasking him with as the day one, year one priorities as he gets ramped up?

Well, so I think he's an excellent choice for us. So, he comes in with public companies CFO experience. I'd say beyond that, just very broad experience. He also has an undergraduate degree in chemistry, a master's in chemical engineering. So I think he'll understand our work and what we're doing here very well. I think understanding that technology is a real positive for us. He's a bit of a known quantity for me personally. I worked with him probably about 25 years ago, but it was someone I've kept in touch with a little bit. And I think he'll be an excellent fit for Orion. We're a very global company. He's had expatriate experience in Latin America. And I think that's a big plus for us. I just think we're very, very fortunate to be able to have Bob as our CIO and Jeff coming in as our CFO. And I think that's going to make a really strong team. If I go back to that very first question, I think key things for us as Orion is thinking about our capital allocation. And that's clearly an important part of this role for our financial team as well.

The next question is from the line of Laurence Alexander with Jefferies.

This is Maria for Laurence Alexander. I just have two quick question. First one, could you provide any updated view on how much the new capacity will add to EBITDA over the next two, three years?

Well, so what we've given in the past is sort of guidance around what the EBITDA per ton is. So, we've indicated, for example, that we thought that the Ravenna capacity, which we've commissioned at the end of last year, would be around, let's say, 450, 500, and that we thought that the capacity in Huaibei would be about 400. The remaining, let's say, that debottlenecking, it's more in the Rubber area. So I'd use that as a guidance. And in terms of a kappa settling base technology, we really have to wait till we make an announcement there and including what the final volumes are.

And in terms of the contribution to EBITDA?

Well, those are EBITDA margins I just gave you.

And I guess my second question is, if you can provide any more color on what you're seeing in China right now, any trends we should be aware?

Yeah, excellent question on China. So I think a big question for many people is the zero COVID policy and will that change and different people can speculate on where that'll go. I don't see a lot of value in adding to that. Right now, I think one of the strongest markets in China is actually the automotive sector. This week I had lunch with another executive from another chemical company, and who play in similar but different markets in China. And that was, I think, a uniform view around the table in terms of what's happening there. We saw, for example, areas like fiber, which is really a core market, in terms of the world, a lot of the capacity being in China. Their people have just been very cautious there. I'd say, based on the economy, based on higher energy prices, that that's been some area, for example, that slowed a little bit, but I think automotive is a bright spot for them right now.

Our next question comes from the line of Dan Carroll with Inherent Group.

Thanks for all the detail on the on the CapEx plans. Kind of two related questions to that. One, can you remind us how much CapEx is associated with that $30 million to $40 million of incremental EBITDA from the Huaibei and Ravenna plants. And second, it sounded like there might have also been some plans for increased OpEx investment in product development R&D. I was wondering if you could kind of help characterize the amount of kind of increase that might be year-over-year kind of going into the earnings guidance?

So let me just say, in general, capacity increases, is, I'd say, for traditional furnace based technology, it's in the order of, let's say, $1 million per kt, up to if you're in an area with more expensive labor, very robust air emissions, read that as the United States, maybe $1.6 million, $1.7 million. And Huaibei, I'd guide you towards the lower end of that when you think about capital ranges for that plan. In In terms of, let's say, innovation, improvements, adding some labs as well as laboratory equipment, let me just say this. The package of spending in that area is probably about twice what it was in the last year, and last year was probably an increase as well. So, just with all the commitments we've made in terms of sustainability driving our business, which means for us, conductives and it means sustainable carbon black. There's obviously an innovation investment that needs to go along with that, and we're making that.

The next question comes from the line of Josh Spector with UBS.

Just wanted to ask a quick one on specialty. You noted that there was just weaker demand in fourth quarter. I was curious, is that mostly auto OEM and that recovers when auto OEM recovers or did you see any weakness in any other markets that we should be paying attention to? And was that demand or inventory related in your view?

Not that I think we have to be particularly concerned about. What I mentioned before, about, let's say, high end carbon black for the fiber market, like that's an example of a specific part of the specialty market that was a little bit weaker in the fourth quarter. I don't think that's like a long term trend that people aren't going to buy athletic wear and that kind of thing. I think it was just reflecting, let's say, a cautiousness with the oil prices in that. There's other areas where there's been a little bit of weakening. I'd say, architectural paints, right, a little bit weaker. On the other hand, I expect automotive to improve as the chip situation improves over the course of the year. So, what else would I say? I'd say some of the infrastructure spending, so let's say black pipe, which is at the lower end of the specialty range, that was a little bit weaker. And we'll have to see, for example, how things play out geopolitically right now, which I think could affect that for us going forward a little bit. One of the challenges for us in the fourth quarter was just simply getting the product out. That's a deferral really of volume from point to point. But when we said supply chain challenges, also, it was our own supply chain challenges, in that we had a very extensive outage in our flagship facility in Kalscheuren in the Cologne area of Germany, but that's behind us. Plant is back up now. So, does that help you a bit?

Yes, no, it's helpful.

. Thank you. At this time, we've reached the end of our question-and-answer session.

Well, first of all, thank you all for joining us today. We appreciate all your insightful questions. We're going to be holding our first investor day later this year. It's going to be a hybrid scenario. So, you'll be able to participate, however, you feel comfortable and however you want to do that. And we're looking forward to being able to confirm those dates with you a little bit later in this year. Until then, and until our next quarter, I hope you all have a good rest of your day. Thank you.

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