Greetings, and welcome to the Orion Engineered Carbons' third quarter 2016 earnings conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Ms. Diana Downey, Vice President of Finance and Investor Relations. Thank you, Ms. Downey. You may begin.

Thank you, Operator. Good morning, everyone, and welcome to Orion Engineered Carbons' conference call to discuss third quarter 2016 financial results. I'm Diana Downey, Vice President, Finance and Investor Relations. With us today are Jack Clem, Chief Executive Officer, and Charles Herlinger, Chief Financial Officer. We issued our earnings press release after the market closed yesterday, and have posted an accompanying slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during this call. Before we begin, I'll remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to the risk and uncertainties as described in the Company's filings with the SEC. actual results may differ materially from those described during the call. In addition, all forward-looking statements are made as of today, November 4, 2016, and the Company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, non-IFRS financial measures discussed during this call are reconciled to the most directly comparable IFRS measures in the table attached to our press release. I will now turn the call over to Jack Clem.

Thank you, Diana. Good morning, and thank you for joining us today for our third quarter 2016 earnings conference call. Our agenda today is shown on slide three. I'll provide highlights from the third quarter this year and comments on the performance of our two Carbon Black businesses. I'll then turn the call over to Charles Herlinger, who will provide more detail on our financial results and discuss our outlook for 2016. After Charles is finished, I will comment on the progress we have made on major operational initiatives underway in support of our strategy. We will then open the lines to take your questions. Starting with our third quarter highlights on slide four, I'm pleased to say that we have delivered another solid quarter of growth in both volumes and operating profits. These results come despite this being a reasonably slower quarter in Europe and a challenging oil and feedstock price environment, which has only marginally improved. We grew total volume by over 7% in the period, with growth coming from both segments of our business. The recent acquisition in China provided the growth for our rubber business, while strong organic growth in specialties, which we believe was well in excess of the usual markets growth rate, pushed these sales volumes up by over 7%. We were particularly pleased with our adjusted EBITDA for the quarter. Double digit gains in both businesses resulted in a combined year over year 15.4% increase in adjusted EBITDA to €55.4 million. We took several major steps in the third quarter of this year to further strengthen the business. I'll briefly touch on three at this time. First, we repriced our debt, which will save us €6 million a year in interest expense, going forward. And because of our very strong cash flow, we…

Thanks, Jack. Good morning, everyone. Turning to Slide 8 and our consolidated third quarter results, our volumes increased by 7.3%, or 18.8000 metric tons from the prior year to 277.1000 tons. Faced with sales price declines resulting from the pass-through of lower feedstock costs, our revenue this quarter was €259.7 million compared to 278.7 million last year. However, underlying revenues, excluding the impact of feedstock cost pass-throughs, increased by some €19 million, essentially in line with the increase in volume. Our overall contribution margin improved substantially in the third quarter 2016 by 11.9% to €115.9 million versus 103.5 million in the prior year's period, driven by both our specialty carbon black and rubber black businesses. As the top waterfall chart on the right-hand side of the slide shows, improvement in contribution margin was associated with a number of items in addition to the increase in volume. They include positive price and mix impacts of €6.3 million, which reflect the favorable impact of rubber feedstock pricing surcharges, as well as the benefit associated with the OECQ acquisition. Differentials in currency were lesser factors this quarter compared to last year. Referring to the second waterfall chart on the right-hand side, the €12.4 million contribution margin improvement we realized in the quarter was the key driver of adjusted EBITDA growth, offset by fixed cost increased partially associated with OECQ. Adjusted EBITDA, as a result, grew by 15.4% to €55.4 million. Our adjusted EBITDA margin of 21.3% represented an increase of 410 basis points above last year's third quarter. The last waterfall chart on the right-hand side of this slide analyzes net income development from a profit of €12.1 million in the third quarter of 2015 to a net loss in the third quarter of 2016 of €3.8 million. Although net income benefited from…

Thank you, Charles. Earlier this year, we laid out a series of operational priorities for 2016 planned in support of our business strategy. At this point, I think it's worth reviewing our progress on a few of these. As you can see, we have actively been executing on these plans to position the Company as a more sustainable and value-creative business in the near-term. Our priorities and some of the key actions taken are shown on Slide 12. Our drive for growth of specialty and technical rubber carbon black grades has been heavily supported by the expansion of both specialty related assets and people around the globe to support the sales and marketing of these grades. The China facility is progressing well as we expand our specialty and technical grade mix there. in fact, our Chinese team increased its third quarter volume by about 4% versus the preceding second quarter and was up over 25% against the prior year's third quarter. The Chinese team also successfully implemented SAP and is now fully integrated into the Orion Global One image ERP system, enjoying the full visibility of this platform. In our Cologne facility, we have completed the commissioning phase at the oxidation expansion we recently installed, and are now filling the unit with sales of newly developed premium grades targeted at the high-end coatings and printing markets. In addition, we are planning additional post-treatment facilities in South Korea to meet surging demand, as we will soon be at capacity based on our outlook for sales in this region. We are addressing the imbalance between rubber feedstock cost and product pricing as surcharges in Europe came into full effect in the third quarter of 2016. We also continued to improve our feedstock sourcing flexibility to reduce variable costs. Our global production footprint…

[Operator instructions] Our first question comes from the line of John Roberts with UBS. Please proceed with your question.

Could you talk about the Chinese plant shift from rubber blacks to specialty blacks, how long it will take to complete? And are the margins in China similar to the average segment margin so that we'll see kind of that similar uplift in profitability?

The Chinese facility will primarily, at the beginning, be producing materials directed at the local Chinese market. One of the reasons we wanted to secure this plan and begin this shift was there's certain products and grades that are sold in China that you need to be able to produce in China to be competitive in those. That being said, we will not be producing the [indiscernible] premium and advanced grades in that facility as we do, for instance, in our facility in Germany at Cologne. So, the average margins, while they'll be good, and they'll certainly be much stronger than what we see in rubber, won't rise to the level of the average margins that we see out of our facility, for instance in Germany. The conversion is beginning right now. There was a substantial amount of the growth we saw in our specialty business that came from that. I'm not in a position really to say how much just for competitive reasons at this point, but I would say, of that 4,000 ton growth that we saw, a significant amount of it, or let's say a material amount of it came out of that Chinese facility. And that will continue to grow as we go forward. Our view is a good percentage of that facility should be directed at not only the specialty business, but also the business that it's done so well in, and that's the technical rubber area, which are non-standard, non-ASTM-type grades that are sold not only to the mechanical rubber goods business, but also to some of the more technical demanding tire businesses that operate in China.

And then, secondly, how will the surcharges for tire blacks eventually roll off, assuming oil stays in its recent ranges? Is it as you negotiate customer-by-customer, you'll be rolling it into the updated contract pricing, again subject to negotiation?

Those charges are a European situation, and given the fact that we are in negotiations right now for all of these contracts, I'd rather not say, rather not comment on that.

And your next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

What percent of the business in Europe did the surcharges affect? Was it 100% of the business, or was it only the spot business? Did it include the contracts? Help me understand what percent that that affected?

It was a large majority of our tire customers.

And you mentioned variable cost actions that you had taken earlier this year that should start benefiting, I think you said soon, maybe in the fourth quarter, or 2017 or whatever. What actions are those, and how much benefit do you expect to start receiving in the not too distant future?

Systematically, since the beginning of this business, we have devoted a lot of effort to increasing the efficiencies of our facilities. We're pretty energy consumptive, as you well know, and there's opportunities for us to recover a lot of waste heat, as well as expand some of the co-generation opportunities that we've got. So, our target has largely been to go after somewhere in the 0.5% or so per year of improvement in our raw material conversion efficiencies. We seem to be roughly on pace for that even though that's gotten more difficult in this lower oil price environment, but that's the pace that we're on this year and what we'd be targeting in the next few years, as well.

And then, with the France plant closure, the 6 million in fixed cost reduction, is that what you expect to net to EBITDA benefit, or is it some different number as we start to think about 2017 benefits from that? And then, I think you mentioned it's a 50,000-ton plant. Do you expect to be able to maintain those volumes and serve them through your other plants, or do you think that there could be some type of lost volume there as a result of the closure?

Let me just pick up the net benefit, and Jack will talk about the volume. Most of that, not all of it but most of that, affects cost savings, falls to the bottom line for the reasons you implied in your second question, because a lot of the product we have been producing there is very, very low margin. But, Jack will give you a feel for the volumes.

Yes. Now, obviously, the plant was not a competitive facility, given its customer base and the positioning they had had. So, the decision to close it was driven by the fact that we could reorganize a lot of the volume that we had there that we wanted to keep, that was premium volume, volumes that we thought we'd paid their way, reorganized some of that in the rest of the system, and that which didn't make sense, we would walk away from. So, there would be some contraction of volume. We will not keep it all simply because our system is fairly full in Europe already.

Thank you. Our next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your question.

In your specialty, gross margin is continuing to be on a pretty good trend, but it fell off sequentially a little bit. Is that more of an impact of mix, or are you starting to see higher raw materials come through? And then, if you look historically, your gross margin's elevated, at least over in the chart that you're looking for. Do we go back to that certain level as price cost spread normalizes, or is there something different that holds it up at the current levels?

We've talked about this pretty much on most calls over the last few quarters. The fluctuation isn't really mix related, Ivan. It is raw material price related for reasons that it impacts the revenue number; our profitability continues to move in the right direction. And you're right, when oil prices increase, the EBITDA margin, EBITDA and percent of revenue, will correspondingly come down orders of magnitude we've talked about before. If you had oil back up, I don't know, $90, $100 a barrel, you would see margins closer to the 30% level.

My question's more on, and I understand that, on the gross profit per ton. I don't know what it is right now, it's $727, or does it fall back to that $600 or $650? Basically, what's been the tailwind from the raw materials over the past year?

Yes. we have had some tailwind as oil has fallen, and we've held onto some of those savings. But, the key factor here is we're trying to optimize overall EBITDA. And as we grow volumes, we will take lower margin product, defined as gross profit per ton, to enter an account, and then expand the business. So, that gross profit per ton number, although it continues to increase and will remain around about current levels, will fluctuate as we implement our growth strategy.

As a follow-up comment on that, Ivan, at the gross profit level, we enjoy the notion that we've grown that business quite a bit. So, there's a pretty good factor of operating leverage that comes into play there, too. I mean, just spreading the higher volume over the current fixed costs has been very helpful for that business. The mix is improving, on the one hand, because we're selling more of the advanced and premium materials that have very high margins. On the other hand, as Charles points out, as we expand some of this regional production in the China facility, for instance, it will, as I commented a little bit earlier, come at lower margins. Overall, the way we wash that out in our view, at least, as we continue to grow and spread our fixed costs over higher volume, we think our margins will continue to be strong.

I guess the reverse question, on your rubber blacks, the feedstock, I know it's not getting materially better right now, but it doesn't seem to be getting worse. So, do you think over the time, as we head into 2017, that gross profit per ton goes back into the 200 level, or if feedstock remains where it is, it's going to bounce around this high 100 level?

It gets us back into the question of the ongoing price negotiations and supply contracts for next year, Ivan. I think at the moment, we would be better off not trying to be so specific and see the shape of the business once we've completed those discussions.

Understand. In terms of France, the plant you're shutting down, was that losing money?

It was marginal. [Multiple speakers].

My last question was just more of if you look at the regional change with France coming out and everything, the mix changes here, what's your anticipation for the tax rate looking out for the next year?

We expect the tax rate to be around the 35% mark. It's ticked up a little bit, and as your question actually sort of implies, the reason for that is that the restructuring charges that we're taking for the closure of the France facility are at a 32% tax rate. In other words, the benefit of those restructuring charges is at a lower tax rate than the overall tax rate we normally would expect. So, you've seen a tick-up in this quarter because of that, but we do consider 35% tax rate, looking forward, to continue to be a good number to use.

Thank you. Our next question comes from the line of Duffy Fischer with Barclays. Please proceed with your question.

This is actually Mike Leithead on for Duffy. Tying in a bit with one of the questions earlier about the plant shutdown, we've seen organic volume comps kind of decelerate this quarter. I think we're looking at 1% for the quarter. Was there a negative volume impact from the plant shutdown in the quarter? And can you guys kind of break down how the conditions trended through the quarter, and I guess heading in through October?

Are you asking whether the fourth quarter, calendar quarter of this year would be impacted by the closure of the French plant? Is that the question?

No. This quarter, underlying organic growth was 1%. Was there any sort of negative volume impact from the plant shutdown in this quarter? Or can you guys walk through why things decelerated a bit this quarter?

No, it's not related to the French plant at all. It's just the markets were largely flat in the system. As we've commented in the comments earlier, we saw continued strength in the European markets, but apart from that, the rest of the markets were reasonably flat, [indiscernible] the rubber business.

And fair to say that those conditions continued through October as it is?

Yes, I think that's fair.

If I go back to the initial differentials issues you guys had, I believe it had to do with product prices tied to oil indices. There were some coal-based feedstocks that didn't budge as much as oil, and that kind of altered the feedstock supply-demand dynamics and squeezed you guys. I guess with the recent move-up in coal we've seen over the past couple months, especially relative to oil, did that change the differential equation at all? And are you seeing any sort of supply-demand dynamics changing in the feedstock market?

Not really. I think we're kind of in the same position that we've been. The European market structurally changed, so the surcharges were necessary to implement there. And that's kind of the differential story for Europe, and I think we've largely counterbalanced that with these surcharges that we've put in place. In the rest of the world, and this primarily is the United States, the demand for this feedstock from Asia or from Asian customers, from Indian customers as well, has put additional pressure on the feedstock. So, the differential situation that we've seen in the U.S. for instance, really it's gotten better than it was in the really difficult times, say, more than a year ago, but it still remained as a headwind for us.

Thank you. Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

In your rubber black business, on a sequential basis, maybe your prices are up about €100 a ton. Is that the result of the surcharges, or is there some other factor, mix or something else?

No, it's mainly surcharges, Jeff. That's the main driver.

And the plant that you're closing down in France, what utilization rate was it operating at? And can you supply that tonnage from other facilities in Europe?

We will not be able to replace all of the volume. That was a 50,000-ton plant. It wasn't running at full capacity. It was running more in the. I'd call it the low to mid-80s, depending on the grade mix and how you gauge the capacity of the facility. What we've done, as I mentioned a little bit earlier, is we've reorganized some of the portfolio mix as we go into 2017, moving some of the materials to other facilities, but there will be some of the lower price of what we consider the marginal material that we will not be able to make up in the production system in Europe.

So, that would mean that, effectively, your European utilization rate would be pretty close to maxed out once the facility is closed?

Yes, quite frankly, right now, most of the facilities in Europe, with the exception of that one, and even that one at times, are very, very close to maximum utilization.

Can you just talk about the Chinese carbon black market generally, the degree to which it's slowed and why it's slowed, if that's the correct characterization of it?

I think it has slowed. A number of things there. The tariffs that were put on by the United States against Chinese tires put the brakes, to some extent, on tire production there. A lot of that production moved to other areas in the world, is moving to other areas in the world, but not all of it. So, it has a retarding effect, at least in the rubber black market in China. I think that's probably the largest thing. The other issue is just the notion that there's increasing environmental standards that are coming into play in China right now, which are pushing some of the marginal players out at this point. This is probably a trend where we've actually seen a reversal in Chinese capacity over the last 12 to 24 months as opposed to this almost breakneck pace at which they added capacity up until about two years ago. So, with less capacity, you've got less people chasing volumes out there, particularly in the Southeast Asian area, which is their primary point for export. So, between that and the fact that you've just seen the tire business slowdown in China, there's an overall slowness now. Having said that, our facility is targeted more at the mechanical rubber goods and increasingly so in the specialty area. So, we continue to see with a fairly strong auto build in China may be slowing down, maybe flat but still very large, quite a nice demand for our products out of that facility.

Your volumes in specialties this year have been pretty terrific, and way above market growth rates. Is there an element of pipeline filling such that your growth next year would be impaired, or would be negative simply because you sold so much new product to new customers?

We don't see much, if any, evidence of stocking of inventory, stocking in specialties. It's in some of the higher volume materials, which tend to move the needle a lot when you're looking at the growth rates that we're talking about, or like many carbon black products, they're not that easy to store, so they're ordered on demand and used fairly quickly. So, no, I think the whole notion of inventory stocking is not at play at all here. I think we've got good fundamental demand, we're penetrating markets where we didn't exist before, and we've picked up on some substitution trends, which I think are playing out very nicely for the business right now.

[Operator Instructions] Our next question comes from the line of Chris Kapsch, Aegis Capital. Please proceed with our question.

I had a couple follow-ups, one on the China region. If I heard you correctly, I think you said the business there that you acquired, on an apples-to-apples basis was up 25%, and obviously some momentum there. But, can you just elaborate on what the key drivers of the success for that business are in that region and that economy? Thanks.

No, Chris. I mean, it depends on how you measure it, obviously. We bought the business, fully owned it in the fourth quarter last year, so volumes have come in line with our expectation, and profit EBITDA as well. But, maybe you could just rephrase your question in terms of being up 25%.

Yes. On a pro forma basis, what was the organic growth?

Yes, just to comment on that, year-over-year we did see that grow. Sequentially, up four points. Year-over-year, as you've pointed out and as we said in our commentary a little bit earlier, some of that is just simply filling out the business and tapping into some of the capabilities that we've got as an organization.

Is there any specific end markets or applications that are driving that growth in success, or is it just a matter of focus and I guess filling out an under-utilized asset?

A bit moving into specialties, a bit just pushing these more technical and special lever products that we have in that facility into the market a little bit more aggressively.

And then, also a follow-up on the transition with the plant closure in Europe. I know you mentioned there wasn't any negative impacts. I was curious more if there was any positive impact on volumes with any customers there that can't necessarily pivot and substitute readily some of the grades that they're getting from that plant. Was there any sort of pre-buy of customers that now anticipate having to requalify any benefit in the current quarter? And then, also, I understand the fixed cost reduction, but the extent you see benefit, it's really going to be presumably from better fixed cost absorption, your other plants in the network. So, is there any way to ballpark what the anticipated benefit would be from the better absorption? Obviously you have to see how much of that volume retained from other plants, but any parameters around that might be helpful.

Yes, I'll comment on the pre-buy, and Charles can take up the cost question. On a pre-buy piece, yes, it's possible. I don't think it's going to be enough to really move the needle for our entire business in the fourth quarter, but there are some products which largely would be, I think, inventoried to some extent. Just to help in the transition as we move from operations in 2016 to not in '17.

Yes, and in terms of the bottom line impacts, it'll be most of those fixed costs savings, Chris, to the point about the type of product we were producing, are still producing in that plant. So, most of the 6 million will fall to.

And that's on an annualized basis in fiscal 2017?

Correct.

And then, just finally, I know you don't want to comment on ongoing contract negotiations. Is there any way you could characterize, though, what you might view as a successful outcome during this season of contract renegotiation?

Interesting question. No, I won't comment.

Thank you. Our final question comes from the line of David Diamond with Rovida Holdings. Please proceed with your question.

Most of my questions have been answered, but I had one big-picture question. Since investing is not about what is today but is about more what could be in the future, I'm wondering if you could comment on your capital deployment plans as you rapidly approach for Orion a post-two times levered balance sheet. You're generating a significant amount of free cash flow above and beyond the dividend, and your productivity plans and your maintenance CapEx. So, as investors, obviously you're thinking about this. Your Board is thinking about this. As we think about 2017 and 2018 as you approach that level quite quickly because of the nature of the business and the cash flow-generative nature, what do you plan to do with the money? How at least philosophically should we think about that? Thank very much.

I'll take that question and really just repeat what's in our earnings release, and that is our focus right now is getting to the two times levered level. That is still some way off, and we're at 2.5 times. And our focus in that period, or until we do that, is on the three items, our three priorities, namely paying our dividend, investing in optimization CapEx sorts of projects we've been talking about today, and also deleveraging to achieve that goal. I think to look at in the two-year or so period on a call like this is not appropriate. As we get closer to the target, we will, in good time, address what we think is then appropriate for the business. But, it is a two-way process. We need to listen to investors, and we need to see how the business develops, and then we need to take a more real-time decision at that time than trying to reach out so far into the future at the moment. But, you are right. Our capital allocation strategy is going very well. It is underscoring what we see as real value-added in this business. And we think right now we are getting from most investors, slowly but surely, recognition for our capital allocation priorities.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Clem for any closing remarks.

Well, thank you, very good questions today. We appreciate your attention on the call. I hope we've given you a good picture of what's happened so far in the third quarter and year-to-date, and also a good view of what we've accomplished in the last couple of years, or several years as we've built this business. We look forward to speaking to you again, and thank you again for attending this call.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.