Greetings, and welcome to the Orion SA Q2 2024 Earnings 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, Chris Kapsch, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Sachi. Good morning, everyone, and welcome to Orion's conference call to discuss both second quarter 2024 results and to provide a mid-year update on some strategic context, which we believe will be helpful for the investment community to consider. This is Chris Kapsch, new to leading Orion Investor Relations efforts. I know many of you from prior roles and look forward to working with you in this new capacity. Joining our call today are Corning Painter, Orion's Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. We issued our 2Q earnings after the close yesterday. We have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call. Before we begin, I am obligated 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 Securities and Exchange Commission, and our actual results may differ from those described during this call. In addition, all forward-looking statements are made as of today, August 2. The company is not obligated to update any forward-looking statements based on any 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 tables attached to our press release. And with that, I will turn the call over to Corning Painter.

Thank you, Chris. Before walking through the detailed deck, let's skip to Slide 4 and go right to the heat. Why our Q2 EBITDA was below expectations? And what is our path forward? You will see our revised 2024 guidance midpoint is now $25 million to $30 million below the expectations we set at the beginning of the year. Lower-than-expected Rubber segment volumes and adverse cogeneration are the major factors. Our Specialty business is performing well. Volume was up again in Q2, and I'm not concerned about the decline in GP per ton compared with last year. This was mainly due to prior year timing effects and one-offs, lower cogeneration and higher maintenance. Most of these factors show as higher costs in our EBITDA bridge for this segment later in the deck. This business is improving with strengthening polymer and coatings markets, which netted to a slightly negative mix in the quarter, but that's fine. We respond to customer demand. The GP per ton level is within our expected range. Let's focus then on the rubber business. First and importantly, pricing is up year-on-year, and we expect to gain in 2025 as well. Volume is nearly flat, but the underlying story is not as positive. Rubber Carbon Black demand is soft in our key markets with three drivers. First, as consumers adjust to higher inflation, they are currently trading down to lower value brands, which ultimately hurts us. Second, but related to the first item, higher imports have been up sharply in North America and Europe. I have more to say about that in a little bit. Third, trucking activity follows manufacturing. And while this is perhaps bottomed, the recovery is gradual at best. This impacts truck replacement tire and OEM demand. Regionally, rubber volumes are down in North America…

Thank you, Corning and good morning, everyone. Slide 8 covers the company's financial results for the second quarter. Overall volumes improved 3% compared to last year. This was driven by a 17% recovery in specialty volumes, which more than offset a small decline in rubber volumes. The overall EBITDA performance compared to the prior year was negatively impacted by softer-than-expected rubber volumes, a lower cogeneration contribution, one-off benefits last year, timing issues and negative absorption, namely that we did not build inventory as we had planned during the quarter. To provide a little more transparency on the second quarter, we had a strong April, but both May and June fell well short of expectations. On to Slide 9, is the company's year-over-year EBITDA bridge. As I noted during our Q1 call, a more normalized earnings level for last year's second quarter was $80 million after adjusting for onetime items and the forward sale of power at elevated prices. You can see that both volume and price/mix contributed positively overall. Timing issues, primarily related to pass-through formulas and differentials, higher maintenance costs, a portion of which are intended to improve our operating leverage over time and cogeneration with the other primary factors. Slide 10 shows our Rubber segment's 2% year-over-year decline in volumes and an 8% sequential decline. As Corning referenced, the inflation-driven consumer trade down in the passenger car tire market was a key contributor to the softer volumes as well as weaker tire demand in a softer Chinese economy. The consumer trade down to lower tiered brands and the related importation of lower quality tires from Southeast Asia represents a negative impact for Orion's customer mix in both North America and Europe. Gross profit moderated just slightly, owing to the lower Cogen, but was supported by the sturdiness of…

Thanks, Jeff. As conveyed previously and as shown on Slide 15, we are reducing our full-year guidance to reflect Q2 results and our generally subdued full-year expectations for our Rubber segment, partially offset by better than previously projected specialty results. Our revised adjusted EBITDA guidance range is $315 million to $330 million, and our revised EPS guidance range is adjusted commensurately. Our effective tax rate assumption is marginally higher, a function of the jurisdictional mix of our earnings this year. We still expect capital expenditures of about $200 million this year, including the increase in maintenance capital that we've talked about, a continued progress on the greenfield investment in conductive carbons in La Porte, Texas. At a high level, our revised guidance range reflects expectations that rubber demand improves modestly from Q2 levels, based on some encouraging market indicators and signals from certain customers. The Rubber segment's profitability should exhibit resilience with fixed cost absorption improving. We do not provide quarterly guidance, but note that our Rubber segment should not exhibit as much Q4 seasonality, has appeared to be the case, in each of the last three years when EPA project tie-ins weighed heavily on those results in those periods. The Specialty segment is expected to see continued year-over-year profit growth, thanks to end market demand recovery, the absence of downstream destocking in certain end markets and relatively easy year ago comparisons. We anticipate some sequential profit per ton improvement, driven by favorable mix, as demand for higher value products should recover disproportionately and thanks to the commercial ramp of newly qualified specialty products. Looking forward, our mid-cycle EBITDA -- adjusted EBITDA capacity goal of $500 million is on track. At mid-cycle conditions, we would expect about 150 kt of higher rubber and 20 to 30 kt of higher specialty…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. The first question is from Josh Spector from UBS. Please go ahead.

It's Chris Perrella on for Josh. A question, I guess on the volume cadence in the second half of the year. With things being softer, do you see volumes down in the fourth quarter for both Specialty and Rubber? And how should we think about that?

So looking forward, first thing I'd say is July was on track for us and a bit of a recovery, especially I'd say, rubber, it's only one month, but it was an improvement. We would expect some seasonality still in Q4, but just not as much as we've seen in the past, given the absence of a big EPA style high in at that time period. Does that answer your question, Chris?

Yes. And then I just had a follow-up on the cash flow and the buybacks. Given the inventory build and sort of the absence of working capital, how do you opportunistically balance the buybacks? And would you guys increase leverage a little bit to do some of those opportunistically in the second half?

Hey Chris, this is Jeff. Yes, we would be willing to have a slight increase in leverage if we needed to do that. But it's not that meaningful impact both on an absolute and on a leverage ratio basis.

Okay. And then I guess one more. I guess what were the maintenance costs in the second quarter that -- and do you -- will that subside in the third and fourth quarter? Kind of what were those one-off maintenance upgrades that you guys talked about?

Yes. We had simply planned more maintenance in the first and second quarter. Of course, that was in our guidance. But we also had some unplanned maintenance in the second quarter. We have less planned maintenance going forward. We expect less unplanned maintenance going forward. So things like Ohio, the change out of that filtering system, we did a lot of other maintenance at the same time, why we had the downtime. That's the kind of thing that can make one quarter higher than another.

Is there a way to quantify kind of the unplanned maintenance impact?

I'd say we're in the -- let's say, $2 million to $3 million in the quarter.

Okay. Thank you very much. I appreciate that.

You're welcome.

The next question is from Laurence Alexander from Jefferies. Please go ahead.

This is Dan Rizzo on for Laurence. Just in terms of to the strength -- the relative strength in specialty, is there any end markets that are kind of doing better than others? Anything that's outperforming, anything that's underperforming by end product?

Yes. So the coatings area has been relatively strong. That's more than just automotive, but I'd say, in general coatings as well. We speak of polymers, but polymers is a really broad market. So let me say, some of the lower-value areas in that area, Masterbatch going into those applications was strong for us. On a relative basis, actually, ink was a little bit stronger than usual. So those were a couple of areas that look goods in that quarter. I just caution people, there's some movement quarter-to-quarter where we see that buying activity.

Okay. And then do you -- I mean do you publish or release what your capacity utilization is in Rubber Black for you guys and what do you think it is for the industry?

We don't speak for the industry. There is some third-party data you could go for, but we were in, let's say, mid-70s. So that's relatively low compared to where we would see mid-cycle for sure. But with the current conditions, that's where we were.

Would you consider mid-cycle like mid-80s or higher? I mean I think we've seen up to like mid-90s in the past, if memory serves. I mean going back a couple of years?

Yes. No, I think mid-90s, if you talk compared to nameplate would be really hard for this industry, maybe as maintenance continue to catch up for others. No, I would expect to get it in the high upper 80s kind of area. So say 85 to 90 in that range. And to be clear, we were like a little bit below exactly midpoint in the 70s. So there's substantial leverage for us there.

Okay. Thank you.

You're welcome.

The next question is from Jon Tanwanteng from CJS Securities. Please go ahead.

Hi, good morning. Thank you for taking my questions. I was wondering if you could give us a little more color or maybe a snapshot of the economics of tire imports versus domestic production. How that changes as higher shipping costs maybe flow through supply chains and inventories? And if you think that's going to change consumer minds at all? Or if that's not going to matter just given maybe importers may try to push through more volume ahead of what might be tariffs on that kind of stuff?

Sure. Maybe just an anecdotal story, there's a young person in our life, not a direct child of ours, but early '20s getting started in life. And a lot of issues with their vehicle, and they went to get it inspected, which means they had to then go get some new tires. And they were counted how the tire sales person said, "I'll sell you the same tire if you really, really want it. But if you would spend like $10 or $15 more, you could get a way better tire." And I mean I think that conversation is playing out, and that ultimately gets people to a value proposition that's a little bit more of a long-term as people get used to the inflation and wage growth improves and so forth relative to that as we see inflation coming down. In general, I think what you see is really low-value import tires coming through. As we see tariffs coming in, it means to hit the same competitiveness point. We have to go to even cheaper, lower value, less reliable tires or I think what we're going to see is just consumer sentiments moving back towards the higher value, really lower cost of ownership product.

Got it. And to be clear, are you expecting on the trucking and manufacturing side improvement through '24 and '25, just given some uncertainty in the macro here that's appearing to crop up?

Yes. If you look at the freight wage data, it certainly suggests that we bottomed and we're coming up. We're beyond even the second derivative. The first derivative is improved, but like there's a long way to go. So we see that coming I think the data speaks for itself in that right now, that's a gradual improvement, but it does look to be improving.

Okay. And then finally, just in terms of capacity and how you're positioning it, are you more likely to be switching rubber reactors to specialty as that trajectory continues to improve? Or is there a change in the expectation there?

Well, we'll see as this plays out during the course of the year, and we'll put effectively Rubber and Specialty business in competition for our reactor hours. And we'll see how that goes. But my point would be, if there is softness ongoing in rubber, I don't think there will be for all the things I said that would certainly give you a place to move it. But also beyond that, just simply rubber even improving, specialty improving at the same time as we're seeing, it means just natural some of that capital or that capacity is going to be reallocated and tighten up the rubber market as well.

Got it. Thanks, Corning. I'll jump back in queue.

Thanks Jon.

The next question is from John Roberts from Mizuho. Please go ahead.

John Roberts on for John Roberts. I'm looking at the chart on Slide 12. So it sounds like gross profit per ton for specialties has bottomed. I think you said it's going to be up sequentially, but it sounded like mix not really price out spread improving. We're a long way from where we were a little more than a year ago. So what's -- how do we get the margin to go back up materially? Or do you have a lot of price increases going on? Or we're just going to slowly grind up with mix?

Hey, John, Jeff. A couple of things. If you're looking at the trailing 12 months number. First off, you've got a pretty rough Q4 2023 in there, which is kind of dragging it down. That's the first thing. Second thing is the last two quarters, this past quarter has been above that. That's -- actually last two quarters have been above that the 609 number. So we would expect that will turn up in Q3. And certainly by Q4, we should see a meaningful turn up. I think we talked last call about our expectation for the GP per ton for specialty to be somewhere in the $650 million to $700 million range, which we would be and if it wasn't for that one really rough quarter in Q4, which was under $500 million. So you should absolutely be seeing that turning up as we go through the rest of the year.

And we need a much stronger volume recovery to get back towards a 900-ish number?

That has -- I don't think we view the 900 number as a kind of a normal number. That had a pretty significant positive impact from Cogen. if you look back at 2022 and the first part of 2023. So I don't think we would expect to see that. And I think also if you go back a year or so, when we saw our volumes dip in '22 and early '23, what we saw dipping was some of the lower-end specialty products. And as Corning mentioned a few minutes ago, where we've seen a pickup, which is good, has been in some of the lower -- in the polymer area, some of the lower value masterbatch. And even the coatings pickup that we have seen has been a little bit on the lower end of coating. So I don't think the -- we don't believe that 900 number is kind of a sustainable number. Not that we wouldn't strive for, but I think realistically, this year, we're thinking $650 million to $700 million, perhaps there's some upside to that as we look forward, but probably not in that $900 million level.

All right. Thank you.

Thanks John.

Maybe I'll just build on that. So we don't see an upper limit on what can be as we drive innovation and upgrade reactors and so forth, we can still move that on. It wasn't really obvious at the time where European electricity prices were going to land. They've come down significantly. And so that part of the cogeneration story has been difficult there. And just keep in mind, because of the relatively small volume of specialty where compared to rubber, a movement in power prices, there's a much bigger impact on the GP per ton for specialty than in rubber. Next question, please.

Great. Thank you.

[Operator Instructions]. The next question is from Jon Tanwanteng from CJS Securities. Please go ahead.

Yes, I was just wondering if you could discuss conditions on the ground in China right now? And what your expectations are in the guidance that you've provided?

So if we talk about China macro, I'd say China is still an area of greatly reduced economic confidence, people holding off to make investments, people worried about trade barriers and where they're going to export to. You start to see the government now trying to spur some domestic demand, which would ultimately, I think, be very good for China. That's the bigger picture there. For us, the picture is really about [indiscernible]. We've had startup issues with that plan. I've talked about that before, getting it really to the higher grade value materials that we're aiming for. We've made progress in that. We'll have one more outage coming up, where we advance that further. But -- so for us, the opportunity there is a little bit more to getting [indiscernible] back on track. I'd say the overall China macro not so great. OEM build is probably an area of some strength as they continue to export cars. There's something recently out about their impact in the market in Thailand. But I think in general, it's a tough market.

Okay. Great. And maybe just a little bit more on what the mix is there in OE versus tire. And how do you expect that to trend?

So generally speaking, the amount people drive a car in China is relatively lower than, let's say, in the United States and Europe. So the impact of OE is higher. We talk about here, you buy a car, you probably change the tires 3x or 4x. I would say it's more like 2x or 3x in Asia typically or in China, in particular. So the replacement market has always been a little bit weaker. And we see overall tire for local tire companies, which is where we are in the qualification process that that's tough going right now.

Got it. Thank you.

There are no further questions at this time. I would like to turn the call back over to Corning Painter for any closing remarks.

Well, first of all, I appreciate everyone's time and joining our call today and your very good questions. It was a challenging quarter. But when you have a quarter like that, it's important that we get the questions out. We'd address them. We think the underlying business is very strong. And the more we can talk to that transparently, the better this is going to be. We value our shareholder views and we look forward to speaking to you over the next couple of days and have some upcoming corporate access events, including Mizuho's Conference in New York on August 14th. The UBS Global Materials and Jefferies Industrial Conferences in New York on September 4th and 5th, as well as some regional MDRs that we have in the pipeline in coming months. Thank you again.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.