Greetings, and welcome to the Orion Engineered Carbons Third Quarter 2018 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. I would now like to turn the conference over to your host, Diana Downey, Vice President of Investor Relations. Please go ahead, Ms. Downey.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss third quarter 2018 financial results. I’m Diana Downey, Vice President, Investor Relations. With us today are Corning Painter, Chief Executive Officer; and Charles Herlinger, Chief Financial Officer. We issued our earnings press release after the market closed yesterday and have posted a slide presentation to the Investor Relations portion of our Web site. 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 risks 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 of as of today, November 2, 2018, 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 Corning Painter.

Thank you, Diana. Good morning, everyone, and thank you for joining us for our third quarter 2018 earnings conference call. We appreciate your time. Before starting with today’s agenda, shown on Slide 3, I would like to first introduce myself formally to everyone listening who I have not yet met and give some background as to why I decided to join Orion Engineered Carbons. Then, I will discuss my vision for Orion and opportunities to build on our prior successes before getting into our third quarter performance. Our CFO, Charles Herlinger, will then provide detail on our financial results and discuss guidance for the full year 2018. After that, I will come back and share some closing thoughts. Then, we will be happy to take your questions. I’m extremely excited to join the Orion team. Like many of our investors, I chose Orion because it is a company on the move, has a clear strategy and I saw a substantial value creation opportunity here. This has been a seamless transition with Jack Clem joining the Board and continuing to play an important role in the strategic vision of the company. Orion’s strategy focuses on the Specialty and high margin technical grades of Carbon Black. We have manufactured these materials and placed them in the demanding high-value markets. Say it another way, Carbon Black is our core product. We are experts at making it and we aim to sell it at the optimal combination of best price points and volumes possible. It’s a simple and effective strategy. Jack, Charles and the team have done a great job advancing this strategy but I am thrilled to see the amount of runway that remains in front of us. I believe there remains untapped market opportunities and potential in a number of different areas,…

Thanks, Corning. Good morning, everyone. Turning to Slide 13 on our consolidated third quarter results. Overall, volumes decreased by 2.3% or 6.2 thousand metric tons from the prior year’s quarter to 266.7 thousand tons, largely reflecting the impact of the plant consolidation in Korea. On a like-for-like basis, that is excluding the impact of the Korean plant closure, volumes increased by 1.3%. Revenues increased by 17.6% to $394 million in the quarter primarily due to the pass through of higher feedstock costs, as well as base price increases and favorable product mix offset somewhat by foreign exchange translation effects and to a lesser extent lower volumes resulting from the Korean plant consolidation. Our overall contribution margin increased strongly by 8.4% in the third quarter to $143 million versus $131.9 million in the prior year’s period. Now turning to Slide 14. As the waterfall chart on the upper left side of the slide shows, this increase in contribution margin is mainly driven by improved base pricing and mix, the efficient pass through of higher feedstock costs and increased cogeneration income partially offset by negative foreign exchange translation impacts. The second waterfall chart on the upper right-hand side shows the development of adjusted EBITDA. It also shows that the contribution margin increase was clearly the main driver of the improvement in the quarter only partially offset by the timing of fixed costs spend. Adjusted EBITDA increased as a result by 13.2% or $72.6 million. Our adjusted EBITDA margin of 18.4% slightly decreased by 70 basis points versus last year’s quarter reflecting in large part the impact on revenues of the pass through of higher feedstock costs. The waterfall chart along the bottom side of the slide analysis net income development which showed an increase to $24.2 million versus $15.1 million in the…

Thank you, Charles. Orion delivered strong results for the first nine months of 2018 and we look to finish the year strong as we reaffirm our guidance. Beyond that, we believe 2019 will be an even better year. Please turn to Slide 17. We have executed on our margin recapture plan and continue to do so as we speak. We are enjoying robust Rubber Carbon Black demand against the history of modest Carbon Black investment in new capacity. This is driving improved rubber pricing for 2019. At the same time, we are expanding Specialty capacity in Europe and have just acquired Acetylene Carbon Black capacity and another important technology to our array of Carbon Black production methods which is already the broadest in the market. IMO 2020 will shake things up a bit and we are positioned to protect the downside while working to create some upside. Finally, we remain committed to shareholder friendly capital allocation. Again, I’m extremely excited to join Orion and look forward to working with this strong team and established company. Orion’s strategy will remain on course while we also tap into additional ways to drive future profitable growth by looking at new applications for Carbon Black, explore underexposed geographies and improving operations to drive efficiencies at the plant level. Now, we will be delighted to take your questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Mike Leithead with Barclays. Please proceed with your questions.

Thanks. And welcome, Corning.

Thank you, Mike.

I guess to start; there’s been a fair amount of concern in the market recently about Chinese autos, weaker tire markets. I was hoping you could maybe triangulate the difference between the continued positive demand you’re seeing versus maybe some of the data points we’ve seen lately in the tire market?

Yes. So I think one reality is in the tire market in China we’re just not a huge player. We are much more of a specialty and let’s say a high-end Rubber Black player in that space. So when we talk about our vision to our customers in China, which I’m happy to go into, it’s much less slated towards a tire there than perhaps it is for other people. So I’ve looked at some of the same comments you’ve seen and other companies – tire companies that have come up and I don’t think we are in a position to dramatically disagree with them. It’s just to recognize we’re a small player there and therefore we’re able to position our products really in the premium specialty markets.

Got it. That’s helpful. And then on rubber pricing, I assume you can’t get into too much detail but is it fair for us to assume that base price increases next year are higher than the level of base price increases this year?

So for me it’s a little bit of a test on what did they achieve last year. I would just say their robust increases that we have and I think we’ll describe more about that when we come up to the end of the year and we make our forecast for 2019.

Got it. I appreciate it.

The next question is from the line of Kevin Hocevar with Northcoast Research. Please proceed with your questions.

Good morning, everybody, and Corning welcome and nice start to your tenure here.

Thank you, Kevin.

Just wanted to dig into China a little bit more. Just kind of curious just on the Specialty side, it seemed like there was a little bit of volume weakness and you called out China, you called destocking. I’m wondering if you can give us some indication of how that quarter progressed for Specialty and what you’re seeing here and kind of your expectations going forward for volumes there on the Specialty side? And then on the rubber side, just kind of curious, the environment overall in China – are you noticing curtailment starting to occur, like – because I know there’s been changes in how they’re doing. I think last year was kind of a broad blanket sweeping cuts and this year it’s a little more targeted. That’s our understanding. So are you starting to see those curtailments occur? How is the demand environment on the rubber side there? And how’s the pricing holding up there?

Right. So to speak about China generally, so first of all to the curtailments I think it’s early in the season for that. The heating season really isn’t for a while. So I think that’s yet to be seen how that actually plays out on the ground. I was in China a couple of weeks ago and talked to people from a number of industries and I would say the sentiment in the manufacturing world in China right now is sort of wait and see. I don’t think people are really terrified of a trade war because as you know tariffs and FX can sort of offset each other and the two countries have a history of working things out. But I would say people are just sort of cautious and it’s hard to know for certainty when we see an impact on volume. How much of that is destocking? How much of that is – will then be stocking sort of their downstream supply chain and wanting to run that leaner and therefore cutting back production? How much is end market demand? That’s hard to see. I would say certain sectors that were down in, let’s say, August were not as impacted in subsequent months and so it’s been a little bit spotty in there. And I think we just need a little bit of time to see how this thing plays out for us. In general though, if we’re going to compare this to a year ago just so we’re clear on this, volumes are going to be up substantially from a year ago. There’s no question about that.

Okay, great. And then in the Rubber segment, in particular, EBITDA increased sequentially from 2Q to 3Q and I think normal seasonality has that declining slightly because you’re a large player in Europe and just the normal summer downtime there. But you were able to improve that. So wondered if you can give some color there, because I think FX turned against you sequentially but at the same time you implemented some spot pricing actions? You had a couple price increase announcements throughout the world. So wondering if that’s what provided the lift or may be help me understand how you got the sequential lift in EBITDA there?

Yes, I’ll take that one up. Kevin, morning. It’s Charles. It’s really more of a mix story than anything else, Kevin. We had a very good mix in the third quarter which really drove part of that increase. And the other factor was for a variety of reasons, including energy sales and also the way some of our formulae work, we benefitted from a pickup in the oil prices. We talked over many quarters about the fact that the Rubber business does quite well typically as within reason as oil prices rise. Those are the factors.

Okay, great. And just last one for me on the SN2A acquisition. It sound like it cost $30 million. Could you give us any other idea for the sense of sales and EBITDA contribution and how fast the business is growing, just some other metrics around the business?

Yes, I think the key thing to understand about this business is that for LyondellBasell the key priority was getting rid of Acetylene, right? They had a byproduct. When we bought this, we have to commit to continue to take that which of course we’re happy to do. Sales were modest, let’s say, under 10 million; EBITDA was modest. And so the way to think of this is not so much, boy, you bought it for that existing business. You bought it because you got a plan. And we believe we have the opportunity and the capability to bring this into just simply different market segments, and most excitingly for us to get actually into lithium-ion battery.

Okay, great. Thank you very much.

The next question is from the line of Mike Sison with KeyBanc. Please proceed with your questions.

Hi, Corning. Looking forward to working with you again and congrats on a nice start.

Thank you, Mike.

In terms of Rubber Carbon Black pricing, I think you noted in your opening comments that pricing is still pretty far away from the capacity expansion economics. So I’m just curious how far away are we from today? Is it 20%, 30%, 40%, 50%? And how soon do you think the industry can get there to support new capacity?

Great. That’s an excellent question. Let me speak to that. So maybe just a little anecdote. I was with a customer a couple of weeks ago and they were complaining to me basically about the increased prices for 2019. And one of their comments was, we’re paying all this more money and we’re not going to get investment, we’re not going to get new capacity. And in the nicest possible way I tried to explain, you’re right, you’re not and we’re below that point. And that is the fundamental thing here and people have added rubber demand especially for things like off-road products which use a lot of Carbon Black. So that’s kind of the rub. And I think how soon it’s going to be, it’s going to turn out on really how the next cycle of pricing goes. My belief is we’re probably in the neighborhood of two pricing cycles away from the point when it’s going to get to reinvestment in North America certainly. But if next year moves in a really big number, well that could change and that’s going to depend on the market dynamics.

And then you talked about contract pricing being accelerated this year and given your background on your products, you guys are really pros at contract pricing. So do you see any opportunity to change the way the Rubber Carbon Black industry does their contracts? Are there opportunities to have longer term contracts? What’s just sort of your thoughts there in terms of the way the industry has contracts to the tire --?

Yes, so I have brought up that topic, as you can imagine, with several of our larger and I would say of companies who are more strategic thinking, right? Because of them, swings like what’s happening and going into 2019 is challenging for their planning purpose and yet the point is yes, it’s still below reinvestment point. So there’s a little bit of a discomfort in the current model which I think creates a window to potentially think about changing what the business model here is. So I’d say that’s possible. It’s absolutely something I’ve explored with customers. I respect Jack Clem tremendously. He’s been a tremendous help to me in this transition. And Jack just points out that this is – the current approach is sort of deep history in this industry. So we’ll have to see how that goes. But absolutely – I think it would be good for all the players if we move to a more stable contracting system here.

Great. And then one final question on the Specialty Carbon Black business. Organic growth there has been very good for the last several years. But I’m just curious your thoughts on where EBITDA margins should be or what level it should be? It’s come down quite a bit from the mid-30s in '16 and you’re hovering mid-20s now. Any thoughts of where that business should be in terms of profitability?

The whole issue of margin, is that the right way to think of it? And I think we would argue no, because we’ve got this energy pass through issue. So I think we would put it more on $1 per ton in terms of the profit margin on that. And we’ve given a range before I think of 750 to 800, let me just say though that that’s like an average over a lot of different products. And the nature of the Specialty Chemicals business is this particular grade mix, whatever, is very effective in one particular application. You kind of have to be the best in that application and the other application is this one. So depending on how much value you’re creating for the customer, you can drive the price point and your profit from it quite substantially different from that average. So I just want to make it clear is not like we’re pricing and saying, oh, this is the kind of margin we want. We price to the value we create and the market forces that are out there. And that tends to average out in that kind of range historically and I don’t see any reason to change that.

Got it. Thank you.

Thank you.

Our next question comes from the line of John Roberts with UBS. Please proceed with your questions.

Thanks. Welcome, Corning.

Thank you, John.

At Air Products, one of the big changes was going from global gas structures to regional structures. And at Orion you have global segments for rubber and global segments for specialty. And the Specialty Black business seems global to me, but the Rubber Black business seems much more regional, like gases. Is the Orion Rubber Black structure already regional enough in your opinion or does it need to be more regionalized like you did at Air Products, or is that a bad comparison because of the global tire companies?

Well, I’d tell you even – look, I think in any distributed company and both these companies are similar in that that you have a number of production sites all over the world, there’s always an element of being local to that. You can’t function without that. So obviously there’s some local structures in place here. I think it’s worth thinking through what the structure of Orion is and how we go to market with that. But I would just say I’ve been here 60 days. I’m in the process of learning the systems and so forth. So I would just acknowledge your point that there’s an element of global and local dynamic and you need to be able to do both of those well to succeed in this place or in this market space. And where exactly we make tweaks going forward, just give me a little more time on that.

Okay, that’s fair. And then is it fair to think about parallels between Carbon Black and the gasification of resid [ph] and partial oxidation businesses for the industrial gas companies. And I think one of the main differences there actually is I think Carbon Black is a much lower efficiency process. I don’t know if that’s fair, but I thought maybe plant efficiency might be a major target for you.

Clearly, I come from a very strong operational background. So I would say plant efficiency is like a steam methane reformer or epoxy [ph] unit or whatever. There’s a lot of waste energy. And so how we either sell that waste energy or convert into high quality electricity, that’s an opportunity for us here. The yields, so carbon-in, carbon-out are opportunities for us. Uptime at the facilities, quality mix because we’re a specialty player, all those things, debottlenecking, they’re all in there. What’s interesting about Orion is this company is to some degree a collection of companies that got acquired and sort of rolled up over time. So our set of plants there’s a fair amount of diversity amongst them and diversity in what the actual production lines are in each plan. And so that gives us some challenges and some advantages. And I think one of the issues here is that each one of those things I just rattled off might be most appropriate for a particular line in a particular plant but a different opportunity, maybe even the same plan on a different line.

Okay. Thank you.

Thank you. The next question is from the line of Chris Kapsch with Loop Capital. Please proceed with your questions.

Good morning and Corning belated congrats here in your new role. So you mentioned strategically a couple of opportunities that you see, albeit 60 days in here. On expanding the applications range and presuming you’re talking more on the specialty side of the business. I’m just wondering if you look at the organization, do you feel like you have the right skill sets and commercial reach and applications development personnel in order to go after some of these opportunities that you might be seeing or will there be a meaningful retooling of the organization, the additional resources to go after some of these opportunities that you referenced?

Right. Excellent question. So first of all, I’d say the SN2A acquisition is an example of retooling and with that we got the manufacturing facility but also some people who market that today for them. In general, to enter a new market you’re looking to bring in some people, not many, who perhaps come from that end industry and know it very well. And it’s easy to start to get that person up to speed on Carbon Black or in my path like industrial gases. And then that person is able to go out into the industry – the customers’ industry with a high degree of credibility and talk it through. So, yes, if you were looking at a new market that you wanted to enter to bring in a couple people like that would be an appropriate and like a pretty well worn path on how to do it. But I would just say of the current people here, our technical support, sales applications, that sort of thing, I meet with them. Many of them are from the industry they serve and they have got a very good understanding of it.

Okay, that’s helpful. And then in terms of more on the process side and opportunities there in terms of efficiencies, it sounds like you rattled off a number of things; yields, cogen, plant uptime. Is it safe to conclude that the incremental increase in CapEx that you had referenced is targeted at these yield opportunities and is there any way to sort of frame up what the opportunity is quantitatively and over what timeframe, or is it just too early to really talk about that?

Yes, I’d say there’s one other element though of maintenance capital and that’s simply uptime. And our loading on our facilities of the lines that we’re running in many parts of the world is over 90%. So there’s also a value in just making sure you can keep the plant up for that percentage of the time and so we’re not impacting any customers and we’re squeezing and sweating the assets just absolutely as hard as we can. I don’t think we’re in a position to kind of outline what we think this is going to get us this in that kind of timeframe. And I think it’s just a mix of both investing to keep the wheels on the bus so that we make all those sales and we can maintain these high levels of loading as well as creating some efficiency gains.

Chris, we’ve talked in the past and it still applies regarding yield improvement, 1% improvement in yield. Literally the amount of carbon we get out of our feedstocks depending on a feedstock price is round about 7 million to 8 million per year of increased EBITDA. So it’s meaningful but you’ve got to get it. And that rule of thumbs still applies in the context or everything else calling us out.

Got it. That’s helpful. And then just one follow up on the characterization at this point on the contract negotiations in the Rubber business. You mentioned the pricing. You mentioned also that you foresee 2019 being sold out. Does that imply sort of static market shares based on the outcome of the negotiations at least this far or was there any notable share shifts one way or another?

I think the priority of the tire manufacturers and the big MRG companies right now is just securing their supply for next year and I think that’s why the contracts went down early. And I think in that kind of environment it means it’s relatively stagnant. I was just in one of our field locations recently and we had sort of priced our way out of one company and we’re able to sign up another at the kind of price points we were looking at. So I’m not saying there’s no swapping. But I think in general there’s not huge shifts going on right now. I don’t think that’s the priority of the customer.

Got it. Thank you.

[Operator Instructions]. The next question is from the line of Laurence Alexander with Jefferies. Please proceed with your questions.

Hi. This is Nick Cecero on for Laurence. So you talked a little bit before about destocking in China. I was just wondering, are there any other areas where you might see some destocking?

Either conceivable [ph], we have that there and some of that playing out in other parts of the world. I wouldn’t say no, not at all. But I think that’s where we have the most potential exposure to it in terms of channel to market and where there’s probably the most uncertainty in the end market. I’d say the automotive market in Europe right now, some of the environmental rigs [ph] is a little bit uncertain. But I wouldn’t put that as a destocking issue.

Okay, great. And then you also had mentioned before how that’s extending into new markets and I was wondering can you provide some more color in sort of maybe what markets you would like to be in that you currently aren’t in and maybe some current markets that you actually like to expand?

Right. So I think on the market, there’s a couple of things out there. So first of all, we just simply like to do better in the United States where we already are in our Specialty business. That’s an opportunity for us. We would like to keep with the growth that we can enjoy in China. That’s an opportunity for us. We would like to get into batteries in a more meaningful way. SN2A is an example of that. And so that’s maybe a geographic build out, a geographic can I go deeper, let’s say China and an example of a different application. And they are all real, they are all happening.

Great. Thank you.

[Operator Instructions]. Thank you. Ladies and gentlemen, we’ve reached the end of the question-and-answer session. I will now turn the call back to Corning Painter for closing remarks.

So I’d like to thank you again for joining us today. We really appreciate your valuable time. As you can sense, we’re excited about the opportunities and the long runway we see with our existing strategy here at Orion. And we pledge that we are going to be good stewards of our investors’ money as we move down that runway. And just finally to say I’m very pleased to be part of this story. Thank you for joining us. Have a good day.

Thank you.

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