Greetings and welcome to Orion Engineered Carbons Fourth 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. As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Miss 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 fourth quarter 2020 financial results. I'm Wendy Wilson, Head of Investor Relations and Corporate Communications..

Thank you, Wendy. Good morning everyone. And welcome to our fourth quarter earnings conference call. 2020 tested just about every company’s ability to be nimble and responsive. I’m pleased to say the Orion team passed the test with flying colors.

They ensured that our company’s needs were met also in the depths of the reception and through the demand surge.

They implemented many improvements to our plans and work processes, most importantly their exceptional discipline and a hearing to our COVID-19 safety protocols resulted in our having zero workplace transmission of the disease in 2020, a truly extraordinary accomplishment. I congratulate them again on their dedication.

2020 was our first major recession as a standalone entity and so by getting through it well truly something about resilience with how to convey with just words on our call. I’m quite pleased with the speed of our recovery and the strength of our financial position through the end.

Ultimately, we borrowed a modest net $27 million to fund operations for the year and experienced a one turn increase in our leverage at year end. From a capital allocation perspective, in March, we suspended our dividends to provide financial flexibility to weather the impending economic storm.

Going forward, we will emerge stronger as we establish a capital allocation policy that maximizes shareholder value through first ensuring our financial standing across the severe economic downturn like 2020..

Thanks, Corning. Turning to slide eight, while revenue was down 2.1% year-over-year, it rose roughly 12% sequentially, reflecting a continuation of the strong recovery trends we have observed for the past two quarters now.

Contribution margin increased 11.1% year-over-year, mainly due to higher specialty volume and realized pricing gains primarily in rubber. The sequential increase in contribution margin of 18.1% was driven by higher volumes and specialty and strong product mix..

Thanks, Lorin. Moving to slide 16 given the degree of uncertainty with the pandemic we will not be providing adjusted EBITDA guidance for 2021 at this time. For your information, we've established a base case planning scenario, assuming the pandemic does not functionally end until 2022.

As we get a clearer view of the situation, we'll consider reinstating that portion of our guidance. From a volume perspective, for 2021 full year planning scenario assumes volumes resemble the second half of 2020 annualized run rate. However, I remind you that I put a higher value on agility than forecasting.

January volumes were very encouraging continuing the momentum from Q4, with rubber volumes tracking around 98% of year ago levels and specialty volumes tracking about 120% of year ago levels. From an S&A perspective, as a reminder, in 2020, we targeted $15 million in cost reductions, of which roughly $3 million were permanent.

We ended up significantly exceeding our target driven mainly by temporary cost reductions. These temporary cost reduction should reverse in 2020 with the rebound in volumes resulting in a roughly $20 million increase year-over-year, excluding the impact of fluctuations in distribution costs, which are also included in our S&A as reported.

We expect taxable spending to be approximately $170 million, with safety and continuity spending in the range of $60 million and $65 million, EPA related spending to be in the range of $55 million and $60 million and growth investments in the range of $40 million and $45 million.

Depreciation is projected to be in the range of $95 million to $100 million, debt service in the range of $27 million to $29 million, our effective tax rate around 30% and shares outstanding on the order of $16.6 million. Slide 17 restates some key takeaways from the quarter.

They reflect that our team rose to the challenges we faced in 2020 and positioned us for further successes as economies recover. Their focus and dedication were tremendous. I'd also like to recognize our customers, suppliers, community, shareholders, and other key stakeholders who worked with us through this period of time.

We look forward to your continued support as we profitably and responsibly grow Orion for many years to come. With that operator, please open up the line for questions..

Operator:.

Yes. Hey guys, thanks for taking my question, and congrats on a solid 2020. Just maybe to start on the volume side. I mean, that specialty volume you call out for January is quite impressive and I know disaggregating demand and inventory effects is kind of challenging.

But I don't know if you can provide any color of what you've seen over the past few weeks, if there's any subsiding there, or if it's strength from a demand perspective is continuing, and kind of maybe how you think about the sequential volume move in that segments for the whole quarter at this point in time?.

Thanks, Josh. So first of all, thanks for your comments. We intentionally listed the order. We see at this point is primarily end customer demand. However, some portion of restocking and in our case, some portion of some new business in that.

The thing about the restocking, always brings up the question, when is that going to be behind us? And I think that some of our customers have intended to do that for a while. In Asia, for example, to restock before the Chinese New Year disruptions to shipping and that kind of thing.

But I think what people have seen is just demand has continued to grow. And what was going to be perhaps unintended restock has really ended up serving underlying demand. So lots of see how Asia in particular reacts coming out of Chinese New Year. But I think that January is going to be a continued of a strong first quarter..

Okay. Thanks. That's helpful. I guess, maybe just on the specialty pricing dynamics, a couple things to ask around there. I guess, the EBITDA per ton was probably the highest level that we've seen in some time. I assume some of that was pretty strong volume leverage.

And wondering how you see that progressing kind of through the year? And then, as demand remains strong, is our pricing dynamics and specialty different kind of in this cycle? Are you able to get pricing faster, which maybe mitigate the effect of rising raw materials quicker than what you would expect in a weaker demand cycle?.

Excellent question. Well, you can imagine that is a key priority for us. So we're in a situation with increasing input costs, and at the same time, very high level of demand. And that's the situation that lends itself to pricing appropriately for the situation, which in this case, means moving those prices up with an underlying cost inflation.

And that's something we're going to be working very hard on..

And, Josh, I would just also add that. In terms of GP per ton, we ended the year in the 640 level, as you can see on slide 12. And we should see some favorability in the new year, probably in the 680 to 690 sort of range. On rubber we also expect that GP per turn to be higher, probably in the 250 plus range..

All right. Thanks. I'll turn it over..

Our next question comes in line of Mike Leithead with Barclays. You may proceed with your questions..

Great. Thanks, guys. Good morning. And nice end to the year, and it seems like volumes are carrying over, at least into the beginning of the first quarter here. I guess it seems like there's a fair amount of moving pieces, obviously demand -- the oil prices are coming back up.

And you talked about some of the temporary costs coming back into the business.

So maybe just give us a sense of where earnings are trending so far in first quarter?.

So, I'll take a first set of comments on that. And then I'll let Lorin, allows you to make some further comments.

So I think first of all, the situation is set for one where we would see a positive for earnings, right? So the oil price, we've given the metric before on how changing oil prices can affect our P&L, and there's no reason why that isn't going to play back and exactly the same way as oil prices come up.

It is sometimes a challenge in the specialty environment that was very fortunate. Right now, the specialty volumes are very strong at the same time. So all of that lends itself to a favorable situation from a profitability perspective..

And I would add that, from a volume perspective, our planning scenario assumes if you do the math, about 90% of 2019 levels, and that the current crisis doesn't end till 2022. I know that that isn't the guidance in terms of EBITDA guidance that we've given in the past.

But if you wanted to imagine, 95% or 100% of 2019 levels, we've also given perspective in terms of incremental margins. That will be helpful in terms of getting there. And the 30% to 35% for rubber, we think is still a reasonable proxy and the 45 plus for specialties as well.

A rising oil price environment on balance, over the course of a year should be a net benefit to us. If you think about Brent, last year, averaging about $43. For example, if it averaged $10 more per barrel, we would expect a positive impact on our EBITDA between $7 million and $10 million on average, over the course of the year.

And so, we won't give quarter-to-quarter estimates on oil price dynamics, but on balance, arriving price environment as a positive for us..

Got it. I apologize, just because there's so many moving pieces, I'll make sure I understand. You talked about oil being a positive. And it sounds like orders are continuing positive. Should earnings trend higher sequentially or lower? I guess without the guidance, there's a lot of moving pieces.

And I just want to make sure I have the right expectations there?.

We haven't provided guidance. But we given the volumes, which are definitely a move forward. So I think one can use some of those ratios as Lorin just said. And I think doing that math, you come out with a favorable picture.

Lorin, did you want to add something?.

No. That's right..

Okay, thanks..

Our next question comes to the line of Kevin Hocevar with Northcoast Research. You may proceed with your question..

Hey, good morning, everybody. Nice kind of the year there. Curious on the -- so on the new capacity front, so 25,000 tons being added next year, another 65,000 to 70,000 tons a year after that. How much is it adding to your specialty capacity? I think you sold 230,000 tons this year.

So how much is this adding overall cumulative to specialty? How much is it adding to the mechanical rubber goods? And are you aware of other -- it seems like you're not targeting the tire grade rubber, but more on the specialty and technical rubber.

Are you aware of other capacity additions coming in specialty and technical rubber over the next couple years as well? I'm just trying to get a sense for what type of capacity is being added over the next couple of years here?.

Right. So the 25 tons in Ravenna, that reactor makes specialty, it can also make some a lot higher end rubber grades, a typical scenario is that you would start up doing qualification volumes on specialty, but maybe in the first year sell a fair amount into rubber and then that would transition over time.

In a time like this, where demand is really quite strong in specialty, you could more aggressively get a very large portion of that over the specialty quickly. In the case of China, we release a technical rubber grades, so heavily into MRT there as you know. Some of those technical rubber grades that we'd be making here could go into tires as well.

We do have a number of global tire accounts who do have facilities in China. So that's an also an option for us there..

And I would add, Kevin is that, with both of these expansions, if you look at our EBITDA per ton just as a total company, it's about 230 or so. Both of these expansions are well in excess of that. And so they are accretive margin wise and mix wise to the total company..

Okay. Got you. And then, you guys have a couple of facilities in Texas. I believe, some of your competitors do too and obviously there is some -- winter storm impacts going on there.

So curious if you've had any issues with your facilities there? Or if you're aware of any issues in the industry, or suppliers or anything like that, that could affect your facilities or industry facilities, or your suppliers down there?.

Right. Well, so first of all, thank you for that question. Because it gives me a chance to just recognize our employees and our investors as well. I mean, in Texas, Louisiana and other areas that have just been quite impacted by this situation.

We have a really salute the employees who have come to work, working on our facilities, getting us online, keeping us online, maybe at home and there's some pretty significant hardships. And in particular in Borger, Texas, where the team has kept the cogeneration unit going, which of course is an important issue in Texas right now.

But we have been impacted. We've been impacted by utilities, natural gas and power. And we're in different situations in different plants in terms of reactor lines, in terms of if we have to go ahead or where we are and restarting our full operation at this point..

Okay. Thank you very much..

Our next question comes from the line of Jon Tanwanteng with CJS Securities. You may proceed with your question..

Hi, good morning, gentlemen. Thank you for taking my questions and nice quarter.

Corning, can you clarify? Did you say you achieve similar pricing to 2020 on an absolute level or some of the pricing increases? I'm not sure if I heard the right thing there?.

What we've said is that our profitability levels and our share levels were essentially stable year-over-year in terms of pricing margin..

Got it.

So as you head into Q1 that the pricing hasn't changed too much?.

Correct..

Okay. Got it. And then can you want just talk a little bit about the quarterly cadence as you going to see this year. I get that Q1 is going to be strong and the continuation of momentum that you're seeing in Q4 and then inventory is staying low.

Do you see a little bit of a hangover as we reach Q2, or Q3? And maybe does that bounce back up as we exit the year if vaccination rollout of plan? What are you thinking just in terms of versus historical seasonality, and how you see this year playing out?.

So Jon, I'm unfortunately going to disappoint you on this. I mean, I think there's so many scenarios out there on how the disease is going to play out, vaccines are going to play out, consumer confidence. And then you have to think about that for each of the various markets that we're in. And I think that is a very dynamic situation.

And that's why we've chosen not to do guidance, just because I think guidance implies more certainty than their current environment allows for.

Our focus on this is whichever way these things play out, we're going to be agile; we're going to be reacting to them, taking plants up down whatever we need to do to support our customers and run the business well. I would really -- it would just be speculation in my opinion in terms of playing out how the year is going to go..

Okay. Fair enough. Sorry, go ahead..

Let me just add that. I want to be clear that, the fact that we're not giving guidance simply reflects us being candid to say, we don't feel confident that we can forecast vaccinations and impact of variants, et cetera. But at the end of the day, I hope that you and others have what you need, if you want to assume 90%, 95%, 100% of 2019.

I think we've given the kind of perspective that allows you to do what we're doing, which is looking at various scenarios, and what those outcomes could be..

Understood. And thank you for that color. I appreciated. Just one last one for me. With the $55 million to $60 million in CapEx on EPA spend this year.

Do you have update when you're going to complete the invest? How much more is left in terms of costs and your latest talk with your contractors?.

Well, so we would expect them in 2022 to do about $50 million, have the balance in order let's say, 15 to do in 2030? Does that answer your question?.

Yes, it does. Thank you very much..

All right..

Our next question comes from the line of Chris Kapsch with Loop Capital Markets. You may proceed with your question..

Yes. So thanks for taking my question. It's sort of a follow up on what Lorin just said, with respect to the volumes that might be expected in 2021 vis-à-vis 2019. And I guess, just looking at your slide seven, if I look at that capacity that's available.

It looks like you're -- I'm assuming that first bar there's kind of say the full year, which would imply about 82% utilized over the course of the year. And if your general comments about 2021, volumes looking like second half of 2020 volumes, it looks like you get to as you reference just now, Lorin call it 90% to 95% utilization rate.

So I'm just wondering, is that way -- is the right way to think about it? And then are those -- the improvement over 2020, is it balanced across rubber black and specialty? Or is it -- does it -- do you think it's going to be skewed more towards specialty?.

Yes. I would say, when we initially came up with the planning scenario, we did exactly what we're saying. We looked at the second half volumes and we analyze those. Clearly, you are seeing, based on our January, February order books, specialty outperformed year to-date.

As you look at that incremental capacity to an economic recovery, we do publish our contribution margins for the public company, which are about 530. And so, yes, specialties outperforming year to-date. But I think I just use the aggregate contribution margin rather than guess about mix at this point.

And that gives you a sense for what the upside could be..

Okay. And then, just to follow-up on that the -- the incremental margins that you reference 30% to 35%, for rubber 45% plus.

Is that just a function of the better overhead absorption? Or does that also factor in right now a more favorable energy scenario over 2020 and a more favorable FX scenario? Or would those be sort of incremental to the incremental margins? Thanks..

Those both would be incremental. And so those incremental margins our oil price neutral. To the extent that oil prices, I'm just using an example, our $10, on average for 12 months we would expect a favorable impact on top of that on the order of $7 million to $10 million. To the extent that FX is up year-to-year.

We provide guidance there that says for 1% change on average, for the full year, there's a $2 million EBITDA impact. So those both would be additive to the core incremental margins..

Okay. Yes. Thanks. And then, I guess the -- this stable pricing over 2020, not a bad outcome, given the great year that 2020 was. Has you given an order of magnitude of how much that base pricing was up for 2020 over 2019? I'm just -- if I'm going to sort of tossed away 2020, I think we'd all like to forget 2020.

But compare 2021 to 2019 in addition to those incremental you have that better price -- better pricing.

So can you just remind us what the improvement was?.

Well, let me say, on the rubber, what we're saying is that the pricing will resemble last year sort of year-over-year. So if you look at revenue by KTs, you'll get an average selling price for rubber. And we're saying, we're pleased that the outcome resembles last year..

Okay. Fair enough. I think I can do the -- solve these equations to unknowns from here. Thank you so much..

Thank you..

Our next question comes from the line of Josh Spector with UBS. You may proceed with your question..

Yes. Hey, again, thanks for taking the follow up. Just a quick one on the bridge, Lorin. The other line, overall, was a more significant negative than I would have expected. And you guys talk about the oil prices and higher fixed costs. I guess year-on-year and the bigger negative than 3Q.

I'm not really sure how to interpret that, what that means for first quarter, second quarter, if that gets better or worse, or if there's anything unique within the quarter?.

Sure. For the first quarter, you should expect that other from an oil price dynamic, it could very well be flat to positive, because oil prices have risen. And so, we've shared with you that on the way down, it's a tailwind -- a headwind. And on the way up, it's a tailwind. So that was the end of 2020.

And it was negative year-over-year, as well as the capitalization that we've benefited from et cetera. But as we look into the New Year, it's a New Year. And it depends on the year-over-year oil price dynamic, which today is tilting towards positive. And so, I would say close the book on 2020.

And as we look to 2021 it'll just depend on oil price dynamics, which so far are upward..

Okay. I guess maybe for me to clarify then, is that -- was it a bigger impact in 4Q versus 3Q because of the volumes being higher and it had a bigger impact. Because I guess I look at 3Q and say, oil price was lower year-over-year for the prior six months to that versus 2019 and the impact was less.

Is that the main driver?.

No. The main driver was that in the fourth quarter of last year, we had lower bonus accruals. And we had more capitalization as some at our plants of fixed costs. These are idiosyncratic, dynamics that wash out. And so that's why you saw a bigger other in the fourth quarter than the third. And over trailing 12 month basis it's a wash. That's why..

Okay. Thanks. Just quick on sustainability. I guess you saw an announcement from large tire producer, that they're investing in some recycling capacity with what appears to be a recycling company. And part of the outputs there is carbon black from there.

And I was little bit surprised to see no carbon black or major carbon black producer involved in that project.

Is there anything we should be reading from that? Or is there involvement from you guys and others in that arena?.

So I'm not sure exactly which project you're mentioning. We are an active participant in the black cycle project. And in that scenario, we'd be taking the oil from the pyrolysis process, and then converting that into carbon black. Maybe just a background on this.

So the program is you take end of life tires, you shred them, you put them in a pyrolysis unit, which means you heat these things up to high temperature. And coming out of that you end up with some solids, they are mainly carbon black, but they also have ash in the other materials that are in a tire.

And you also get this pyrolysis oil or tire dried oil, and so forth. So one approach is using that oil, we're in some programs working on that as well as other, let's say, renewable sources or carbon black oil.

The challenge with the recycled carbon black is just in terms of applications, the relative impurities that are in it, and the overall condition of the carbon black. That's something that we're certainly very interested in and we continue to follow..

Okay, I guess you are specifically referring to Michelin project being done within Viro.

Is that something that you guys are involved in?.

No, we're not in that. We're in a different project called black cycle..

Okay. All right. Thank you..

Our next question comes from Laurence Alexander with Jefferies. You may proceed with your question..

Good morning.

Could you touch on a couple of things? One is, is the arrangement with the EPA kind of set and done? Or are there areas where is that new EPA could come back and revisit? And if so, could you discuss your expectations around that if any? And then I guess secondly, can you give some sense of how you're thinking about the ground rules for growth CapEx once the EPA projects are done? And then lastly, your thoughts around what conditions or constraints might lead to delaying or deciding to reinstate dividends?.

Okay. So let's start then in sequence with the EPA. The consent decrees that we and essentially all the other carbon black manufacturers in the U.S. operate under were negotiated under the Obama administration. So we don't think there's going to be any further, like air emissions issues associated with us.

I think they tend to go from industry to industry. And I think we're all in the implementation, though there, I don't expect any changes to that. In terms of growth, I mean, I would see this in the broader category of just capital allocation.

So we will put up a emphasis on amongst other things, making sure we have the financial wherewithal within our debt levels, and so forth and a position that we want, we'll always be investing in continuity and safety capital for our core business. And after that, we would see highly accretive, highly profitable growth.

I think that's always a good use of money, but at the same time, having a structured regular return of capital to shareholders.

And maybe your final question then is, what would be the timing? What would be things that would go into that? Again, I'd say, the debt levels understanding the economy, both where it is and how stable it is, and let's say macroeconomic situations, as well as the specifics to Orion itself, and then finally coming in with a dividend at a level that is sustainable for this company through a business cycle and their level of which investors have confidence..

Thank you..

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Corning Painter for closing remarks..

Well, thank you all for your time and attention today. And one more time, just a moment to recognize the severe hardships in much of Texas, Louisiana, other parts of the south and one more time appreciation to our employees who are keeping the lights on so to speak and our facilities at a time when there's a lot of personal hardships as well.

So thank you all for that, and everyone have a nice day. Thank you very much..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day..