Greetings, and welcome to Orion S.A. Full Year 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wendy Wilson, Head of Investor Relations. Thank you, Wendy. You may begin.

Thank you, Raju. Good morning, everyone and welcome to Orion's conference call to discuss our 2023 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer; and Jeff Glajch, Chief Financial Officer. We issued our press release after the market closed yesterday and we also 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 15, 2024. The company is not obligated to update any forward-looking statements based on new circumstances or revised expectation. 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. I will now turn the call over to Corning Painter.

Thank you, Wendy. Good morning, everyone and thank you for joining our call today. In 2023, we delivered another year of record-adjusted EBITDA, our third year of growth. As good as that is, we are not satisfied. If demand had not cooled off over the year, our results could have been in line with or even beaten our initial guidance. When Jeff takes you through the EBITDA waterfall on Slide 9, you'll see just how impactful the 2023 contract round was and how the slowing underlying markets impacted us. The good news is, as we predicted, we achieved our goals for the 2024 rubber pricing cycle despite relatively weak demand in our key markets. I believe this sets us up well for the 2025 cycle, which will be negotiated later this year. Our customers remain cautious about 2024 volume, and our guidance reflects that. I'll explain more about that later on the call. Focusing on 2023 and consistent with our pre-release commentary from our January 22 press release, full year adjusted EBITDA was $332 million, and adjusted diluted EPS came in at $1.92. We also delivered strong operating cash flow and strengthened our balance sheet. We returned $1.10 per share to shareholders by repurchasing stock. We also lowered our debt by $1.30 per share, or $78 million. This reduced our net leverage to 2.35 times EBITDA, down from three times EBITDA just 18 months ago. On the operations front, we completed our final air emission upgrade project in the US. It is hard to express how big this is for Orion. A huge thank you to our engineering and operations teams. Well done. This now allows us to focus our capital allocation to growth, debt reduction, and returning value to our shareholders. I see capital allocation as my top responsibility…

Thank you, Corning. On Slide 5, you can see the consolidated results for the fourth quarter. Beyond this slide, I will focus more on the full year, but the detailed quarterly financial and EBITDA loss for both businesses are in the appendix. For Q4, volume was up mainly from the specialty polymers market and from our new facility in China. This was partly offset by lower volume in the Americas. Revenue was essentially flat due to higher contractual pricing in our rubber business, offset by lower oil pricing in the quarter. Gross profit and gross profit per ton were down due to the cogeneration effects from the lower European electricity pricing and unfavorable product and geographic mix in both segments. In addition, higher maintenance turnaround activity, including Huaibei, the final EPA startup cost, and other timing items affected the quarter. Gross profit per ton was up slightly in rubber versus Q4 last year, but down sequentially at $357. Rubber gross profit was weak due to several reasons. First, volume was slightly up, but we had more volume in China and less in the Americas. This geographical swing adversely impacts gross profit. Second, the expected impact on cogeneration from lower electricity prices in Europe. And finally, continued startup costs at Huaibei and the final EPA project, which hurt rubber gross profit level. Especially gross profit per ton was down very sharply versus prior year and sequentially at $492. While we had higher volume, it was primarily from the lower margin polymer market at Huaibei. This resulted in a less profitable product mix in the quarter. Specialty was impacted by the lower electricity prices in Europe, similar to rubber. European cogen effects are more impactful than specialty on a per ton basis, since global rubber volumes are 3x to 4x times down…

Thanks, Jeff. And just one clarification. It's $1,000 per ton on the specialty, and we think that makes sense for all the reasons Jeff just outlined. Based on our discussions with customers and given the slow recovery in our markets that we've observed, we're projecting mid-single-digit adjusted EBITDA percentage growth in 2024. Many chemical firms saw their profits shrinking in 2023 and are bouncing back from a lower base. With projections of a soft landing in the U.S. and the expected weakness in the EU and Chinese economies, we expect our EBITDA growth for 2024 to be similar to what we achieved in 2023. That said, we believe we are well positioned for whatever 2024 brings, and it will be another year of record growth for ORION. We are confident in our business and we are setting our adjusted EBITDA guidance range to $340 million to 360 million today. This EBITDA guidance is up over 5% at the midpoint and supports our adjusted EPS guidance range of $2.05 to $2.20 per share, which is an increase of 11% at the midpoint. I'll close with six points. First, we built on last year's rubber pricing gains, an upset. Second, we're beginning to see a rebound in specialty mix in Q1. Third, 2023 was our third straight year of EBITDA growth, and our expectation is that 2024 will be our fourth. Fourth, the U.S. air emissions projects are complete. This is huge for us. Fifth, we don't have the one-time working capital reduction from improved customer terms like we did last year. Nonetheless, underlying discretionary cash continues to improve. Sixth, this year, our growth investments are focused on our new acetylene-based plant in LaPorte, Texas, and some debottlenecking of our high-value products the customers want. With that, Raju, please open up the lines for our questions.

[Operator Instructions] The first question comes from the line of Josh Spector with UBS. Please go ahead.

Hi. Good morning. I wanted to ask around CapEx. I think, Jeff, in the comments, you may have clarified a bit. 2025, really, what should we be expecting as a base case? So is $150 million-ish the base case, and then you would invest more in de-bottlenecking if need be? And I ask that in the context of you show what capacity you have in specialty. You have a pretty muted outlook on volume this year. It would seem you could grow into your capacity over the next few years, and maybe shift to cash return versus growth. And I'm wondering how you're thinking about that different dynamic?

Yes, so, I think you're correct. You should think about $150 million as a number that we're on track of for next year. Then we'll look at the additional cash we have and we'll consider strategic options. So maybe there's something around batteries that, we want to continue to invest in and see an important element there. It might be that we see no. Really, the best thing here is simply to return the capital via share purchase, or other mechanisms for it. It might be that we decide to green light some, let's say, lower-risk productivity projects. But, I'd say $150 is what we're on track for. We're really just trying to show that we have growth opportunities. We have opportunities to enhance our profitability that are discretionary for us. Jeff, anything you'd like to add?

No, I think that it's a pretty clear. We will decide this as we get later this calendar year. We're looking into 2025, our capital allocation, what's the right approach for us. I think, importantly, though, if we do spend in 2025 for growth, or productivity CapEx, it's not likely to have a significant impact on the 2025 profitability levels, or more beyond that.

Thanks. I mean, what do you say investors that might look at that Slide 14 and say, you spent a couple hundred million on growth investments and you're not seeing it in specialty? I guess obviously, that's probably not fair in the context of where volumes are today. But, what's the embedded view there about your success on those investments and returns?

The one big investment we have in specialty is the acetylene facility in LaPorte. It's not on stream yet. So, no one should expect to see something from that yet. People should look at this I think you could say, yes, they're on track for $150 million next year, but it's a company that has growth prospects. There's another concern out there, what's your next act? I would just say we have choices on it, but they're choices. And clearly, if we don't think the market's ready, we don't think the timing's right, if we don't think the environment is clear, then we wouldn't do it.

Yes, sorry, I guess I was asking about more of the historical spend. Obviously, LaPorte isn't in there, but over the last five years, you've spent a couple 100 million on growth investments. Specialty is still underperforming versus 2019. How do you think about the returns on those investments? Have those met your expectations? Is it just we're not seeing it? Any comments there?

So, I would say the investment in Ravenna, that's worked out very, very well for us. It was loaded very quickly. I'd say the investment in Berre was quite strategic for us. It's opened up this opportunity for us in a steadily. China's a more difficult market for what it's worth of the business in China. I'd say the specialty's doing relatively well. It's a much more challenging environment there right now on the rubber side.

Okay.

Does that help, Josh?

Yes, that helps. I'll turn it over. Thank you.

Next question comes from the line of Laurence Alexander with Jefferies. Please go ahead.

Good morning. It's Dan Rizzo on for Laurence. Thank you for taking my questions. When you look at your assumptions for 2025, do you assume, I mean, I know you assume better volumes, but are you assuming improvement in the overall macro environment in Europe, America, and in China?

Yes, and that would drive us, to the kind of demand profile that would fill up those, take us back to those levels that we achieved before. That we would decide we would say that is more mid-cycle than the current environment, which we would say from our demand profile is quite weak, really, in all three markets, in North America, Europe, and China.

So if we think about 2024 to 2025, then I guess that would assume that 2024, the outlook is kind of back and back half loaded. I was wondering about the cadence as we go into and try to get to the mid-cycle. It would start and beginning then sequential improvements is, I guess, the way we should think about it?

No, no, I wouldn't say that. I think, look, our sense of 2024 is not as strong as I guess some people's are. I was in China in Q4, didn't strike me as an economy that was about to accelerate. I think things are challenging in Europe and North America. We'll have an interesting election cycle. And in case nobody's noticed, like the global water is a little bit stressed right now. So I think it's wise to just listen to our customers who are cautious for the year. For 2025, I think we have a good shot of being in a better place from a global economy, just as the natural cycle of the economy plays out. But again, we're talking about a capacity in 2025.

Okay.

Yes, Dan, just to be clear, we're not assuming that's our 2025 number by any means. That's a mid-cycle capacity number for us, which is how we've been representing it.

That's what I mean, with a return of the environment, I think 2025 could be a really good year for us. Okay. We won't have LaPorte loaded in 2025, right? That's clear. But I think we could see a pretty dramatic swing in volumes in our base specialty and rubber business. It's going to depend upon the economic outlook in 2025, or as you say, as this year plays out.

All right. Thank you very much.

Next question comes from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Hi, good morning, guys. Thank you for taking my questions. I was wondering if you go through a little bit what you're seeing Q1 so far, in both segments from an underlying volume and GP per ton perspective. And I think you mentioned especially rebound. Maybe you could give a little more color on that, where that's coming from. And two, as my follow-on, just what are you seeing in end demand versus destocking inventory trends?

Yes. So interestingly, we've seen some strength in areas, some of which are more, less differentiated. Let's say film and pipe have been stronger areas, certain degree wire and cable. On the other hand, I'd say some things related to automotive and manufacturers who supply that train. So adhesives, engineered plastics, some areas like that, a bit weaker. MRG, certainly weaker for us in China. Regionally, I think we're really going to have to wait until March and April to see how China comes out of Chinese New Year. I don't see the big hockey stick flying out there, but we'd be very happy if we prove wrong on that. And I think, we see slight improvement in North America, and not much in Europe right now as a sentiment.

Okay. And just on the end demand versus inventories and destocking trends, especially in tires?

Yes. So I mean, clearly, anecdotally, we hear from some players, let's say like distributors, who didn't place very large orders last year. One of our largest ones, when the whole thing began, I asked him, one of the owners, like how do you think this is going to play out? And he compared it, to previous recessions and how people overbought, overbought and then realized, wow, I got a year's supply in my warehouse. And two or three years ago, he predicted that to us. What we're seeing now is some of those players I placed are beginning to place orders. So, I think there's some indication that destocking, at least in that space, seems to be improving for us at this point. But this is very much a customer-by-customer situation, and it's going to depend over the course of the year how they see customer demand playing out.

Okay. Great. I'll jump back to you. Thank you.

Next question comes from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Hi. This is Lydia Huang for Jeff. Can you talk about what to expect in 2024 in terms of pricing in the Specialty segment?

So, I think the strength in pricing, we have, as we said, we've been holding our price for the specific products that we're in. I think that we'll be able to continue to do that as the year plays out. If we see a dramatic tightening in this market, obviously supply and demand, that would favor it. But I think that's maybe not going to be the biggest part of the story for this year. When you look at Orion specifically, though, I would always say, keep in mind, mix is very important for us. So, certain end segments, we add more value, so we're able to share in more value when we sell that. So, the mix is where I think you're much more likely, to see it than in, let's say, raw end customer pricing changes.

And in terms of price and mix, do you see a trending down sequentially quarter to-date in relation to fourth quarter levels?

No. No, we do not.

Okay. Thank you.

Next question comes from Jon Tanwanteng with CJS Securities. Please go ahead.

I was wondering if you could give us a little more color on the competitive environment. You mentioned, obviously, that you finished your EP investments. And some of your peers have not done so. And I'm wondering what benefits that accrues to you, how that's incorporated into your guidance, and if you're actually seeing that in the market?

So I think that'll play out for us when competitors bring on their plants. And oftentimes, that's a challenging item. Most of these plants are not very young plants, so to speak. And so that start-up of the new equipment can be challenging. It was certainly challenging for us, as we did the work on our final plant. So I'd expect to see that impact if it plays out that way in Q2 or possibly Q3 for us.

Got it. Thank you. Jeff, I think you mentioned, or maybe with you Corning, that you expect the GP per ton to be relatively flat this year. Did I mishear that? Or was that referring to a specific segment? And just to kind of help me -- understand what the drivers are to that, with prices going up and if you expect volumes in prices?

Sure Jon. I actually think I was referencing rubber, that we expected rubber GP per ton, which was just over $400 a ton this past year. In 2023, we would expect to be very similar to 2024. So we have price increases, as Corning talked about. We also had some cost increases, inflationary cost increases. And we have the, if you recall, we talked about the little bit of a headwind. We have on cogeneration, for some of the forward items that we bought - power forward last year, which helped us. So, we expect GP per ton that was really targeted toward rubber.

Got it. Can you quantify the impact of your year-over-year impact of Cogen, if possible?

So the cogen, we do have the $10 million impact on cogen, and perhaps it ends up being even a little bit more than that. Are you talking 2023 to 2024 or 2022 to 2023? I'm sorry.

If you could get both, that'd be great. But I was looking more for 2023 to 2024?

Got it. No problem. 2022 to 2023, I think we mentioned was $30 million. But that was primarily due to the price impact of power in Europe in 2022. 2023 to 2024, we probably have, we should be at a $10 million headwind that we have from the forward contract that we bought. We also have some additional, if you look at price, most of it, most of the impact was in 2023, but we will see additional impact in 2024, perhaps another $5 to $10 million beyond that.

Understood. Thank you, guys.

Sure.

[Operator Instructions] There are no further questions at this time. I would now like to turn the floor over to Corning Painter for closing comments.

Okay. Thank you for that. So one thing I'd add, Josh, just in my response to you on the whole issue of volumes, also keep in mind that Ravenna was initially going to be aimed at specialty. That plant came on as the invasion took place. And so that has really shifted that capacity over to the rubber area. Just one other area for your modeling thoughts, as you think about that. But look, I just want to thank everyone for taking time out of your day to be with us. We appreciate it. Your time is valuable. And just one last time, it's just hard to describe, not just the capital, but the distraction and the effort, to have the EPA work behind us, is really tremendous for Orion. So with that, I hope you all have a good rest of your day. Thank you.

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