Greetings, and welcome to the Orion Engineered Carbons' First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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, Diana Downey, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss first quarter 2019 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 website. We will be referencing this presentation during this call. Before we begin, I 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 as of today, May 3, 2019 and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release. I will now turn the call over to Corning Painter.

Thank you, Diana. Good morning, everyone, and thank you for joining us for our first quarter 2019 earnings conference call. I will start today's call by providing some general comments on our performance and the industry backdrop. Our CFO, Charles Herlinger will then provide detail on our financial results and related matters for 2019. Then I'll come back and share some closing comments. We will then be happy to take your questions. Turning to slide 3, as expected, Q1 was a challenging quarter, with first quarter performance in at fourth quarter 2018 levels, reflecting challenging market conditions for us and the chemical industry as a whole. Despite the market conditions in Q1, we progressed key marketing programs and destocking appears to have run most of its course. And we feel we are now in more stable footing heading into the rest of the year. Specialty volumes in Asia were weak in January and especially February even considering Chinese New Year with premium products for the fiber and automotive markets particularly weak. In EMEA, Infrastructure and coatings markets were soft in the quarter and the Americas infrastructure was the weakness. Our customers tell us that adverse weather impact was a factor for the pipe industry. However, we are encouraged by the volume trends in March and now in April as well. As these volumes have started to recover and we believe this strengthening trend will continue. Rubber volumes in Asia were also down, beyond the impact of the plant consolidation, in part due to the MRG channel management issues we discussed last quarter. We're making progress in recovering from those issues, somewhat helped by an improving Chinese market and fueled by an announced stimulus plans in China. Americas pricing and demand remained strong. And we have recently gained some modest tire…

Thank you, Corning. Now turning to slide 10, year-on-year volumes were down by 4% adjusted for the plant consolidation in Korea. However, they were stable on a sequential basis. Our Q1 adjusted EBITDA was $64.6 million for the quarter with EPS and adjusted EPS of $0.32 and $0.40 respectively, down from the strong quarter a year ago. Although we achieved our targeted rubber prices increases for 2019, lower Specialty volumes and lower MRG volumes in the Rubber segment as well as FX translation impacts mainly drove this change. On slide 11, on the top left hand side, the main drivers of the change in contribution margin from Q1 of last year were positive price mix mostly from our Rubber segment, which were more than offset by reduced volumes and FX translation impacts in both segments. The change in contribution margin was the main driver of the change in adjusted EBITDA, although some favorable FX impacts on fixed costs translation as well as fixed cost reductions partly associated with the plant closure in Korea offset the change in contribution margin. The waterfall chart at the bottom of the slide shows that the change in net income is principally as a result of the decline in adjusted EBITDA of $11.4 million, mainly offset by a $1.9 million reduction in quarterly finance costs due to successful refinancing of our debt. The change in basic EPS versus the first quarter of last year is essentially in line with the change in net income, whereas the change in adjusted EPS reflects declining add-back items. Coming up this slide, the principal drivers of the changes were positive price mix, offset by negative volume and FX with these impacts cascading fairly cleanly through our P&L. Now turning to slide 12, showing our cash flow and our key…

Moving to slide 13 with our key quarterly Specialty metrics, although volumes and gross profit per ton showed some sequential improvement, they were at levels well below the strong quarter a year ago. On slide 14 we take a deeper look at the main drivers in the Specialty business. Lower volumes, including a destocking of higher margin premium grades are the largest single factor in the quarter. This combined with higher fixed feedstock and other costs as well as the translational FX impacts more than overcame the positive price mix. And within that, pricing was positive for us, but mix was negative. Slide 14 also provides insight into the changes we expect during the remaining quarters, which are incorporated into our guidance range for 2019. In summary, we are not expecting to see a radical recovery in the trading environment back to the levels a year ago. Rather, we expect to see more gradual recovery in our key markets, particularly China, resulting in the following quarters in 2019, running at about 5% above the March and April levels, at least partially offsetting the destocking experienced this quarter. This gradual restocking of customer supply chains is expected to improve Specialty volumes and hence Specialty product mix and fixed cost absorption, together boosting overall gross profit per ton margins in the remaining quarters of 2019 towards the $700 per metric ton level. Other key assumptions are the FX translation rates, oil prices remain in Q1 2019 and you can see some of the rules of thumb for these impacts on to slide 28. Please turn to slide 15. Rubber volumes were up 1.7% sequentially, but down by 2.8% year-on-year when adjusted for the plant consolidation. This performance is compared against a stronger trading environment a year ago, particularly with MRG sales in…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Mike Leithead from Barclays. Your line is now live.

Hey, good morning, fellas.

Good morning, Mike.

Hi, Mike.

I guess first on the Specialty business. Corning, I think in the release you talked about a volume recovery that should improve the mix and profitability of the segment. So is it fair to assume that a good portion of the profitability hit we've seen in this business has been due to the fall off in higher margin products within the segment? Or I guess a better way to ask it is, can you talk about what the mix impact has been to the business' profitability versus say an underlying unit margin compression for your products?

Right. So I think a guideline to the unit margin would be to look at, if you're looking at that major factor walk just looking at the price and that actually has held up well for us in the different segments. What's been the challenge has been the mix in terms of which segments were more advanced inversely hurt. And then when you look at GP per ton, you're also just seeing also increased levels of fixed cost absorption on the lower volume.

Got it, okay. And then two questions on cash flow; one, the $30 million reduction in CapEx. Can you maybe talk about what you - how you identified the projects you chose to pace out versus others that are moving forward like Ravenna? And second, it looks like working capital held pretty much flat sequentially despite the big run up in crude so far this year. So maybe parse apart how you're able to do that in the quarter as well?

Okay. So I'll speak to the capital and Charles will speak to the working capital issue. In terms of projects, we simply prioritized across strategic near term impact. We also had some benefits for cost reduction across them and just keeping a focus on what's most important to us.

Yeah. On the working capital, Mike, the variables are the amount of inventory we have both on raw material and finished goods, we've managed that. We'll need to manage it as the effect of rising crude works its way through our inventory levels. We've got in the backup the slides are typical rule of thumb and we gave a metric, it's on page 28 of the impact on working capital through changes in oil prices. So it's managing the quantity side of inventories particularly. And we've got some latitude on the accounts payable side too to manage that more tightly. Those are the two factors we'll keep focusing on to manage working capital through the year.

Got it. Thanks guys.

Thank you. Our next question is coming from John Roberts from UBS. Your line is now live.

Thank you. I'm looking at slide 29 in the appendix where you give some longer term supply/demand outlook commentary. And it looks like there's a new Carbon Black capacity coming online in Korea, Japan, Southeast Asia and Indonesia. Are those higher capacity increases that you've got in your commentary there?

Yes. So what we're referring to there is actually the supply of Carbon Black. And there are announcements in places like Indonesia for increases in the expansions in there. And in Korea, really there is an existing company that's looking at an expansion as well. So that's what you're seeing there.

And then I don't know if we can pin you down a little bit more on the Evonik indemnification, but I assume that's in euros and is it equivalent to a 110 million or a 140 million or what's the number that's being debated or negotiated?

So we're under a non-disclosure on what's exactly in the contract. I don't think we could go to that degree. For what it's worth, it's a euro denominated sum. But the point is that there is at some point a limit to what we can recover and that's what we're trying to apply today.

Okay. Thank you.

Thank you. Our next question is coming from Craig Bibb from CJS Securities. Your line is now live.

Hi. Hoping you could give us more detail around that MRG issues you have in China. So kind of what are the specific issues and what is the fix and how long does that take?

Yeah, great question. So the challenge for us was just on channel management, which means the distributors that you use and you think you are getting good performance from them and then occasionally you need to shake up that mix. So we've done that. And I think we've made some changes and gotten attention of some other players. So where you see ourselves is on the way to recovering that. We've made a partial recovery and we think we're well underway to get that behind us.

Okay. And then it sounds - your prior producers want to negotiate price now for 2020. Is RCV sold out in the U.S. for next year or likely to be?

I'm sorry, I didn't quite hear that. What's sold out for next year?

The industry RCV production likely to be sold out in the United States next year?

So I mean you have the question of the end degree of capacity into some of us want to hold it back and play the spot market, but I think it will be another year of very high loading. We're let's say in the high-80s right now on our loading. So strictly speaking, we can go a little further, but there is ultimately a limit for all of us.

Okay. And then could you give us a little color around your efforts to kind of restructuring the way that the industry prices?

So we're in those discussions. And this is the time, the right market conditions to drive them home. We really don't have a lot to announce until it's done and we've got something to announce and we're committed to making sure we have a good contract that works well for both players.

Okay. The last one, Acetylene Black, a tiny acquisition, but you guys sold out the capacity there really quickly. How long do you need to learn about production before you're ready to roll that to other facilities?

Well, so it's a different production technology and requires being near an acetylene source. So if we are expanding that we're going to be near - it's going to need to be a new facility near an acetylene source. But in terms of understanding it and all of that, we're well into the qualification process right now.

Great. Thanks a lot.

You're welcome.

Thank you. Our next question is coming from Kevin Hocevar from Northcoast Research. Your line is now live.

Hey, good morning, everybody.

Hi, Kevin.

Wondered if - so Corning, you mentioned that there are some of our contracts are starting to get negotiated for 2020 at this point. Is that U.S. specific, is it across many different regions like Europe as well and how broad basis because I remember at this time last year negotiations also started. So is it kind of just a couple of people at this point, is it more broad-based? Wonder if you could just give a little more color where you can?

Right. So there is some competitive sensitivity to say exactly how many are working with. I would say it's, it's several customers and it's across multiple regions.

Okay. And you mentioned differentials being an issue in the period. How - is that in the U.S., again, is that in the U.S. only, is that also a global effect? And so how big is that headwind, how broad based is it geographically? And I know you had surcharges that in the U.S. at least taken effect in April. So I'm wondering if you have that in the other regions too, if it's happening in other regions and how effective do you expect those surcharges to be?

Yeah. So for those of us who maybe aren't as familiar, what we're referring to here is we have various indexes that link our pricing to how indexes move for heavy heating oil, but that's not actually what we want. What we want is a very heavy grade of Carbon Black oil like a negative EPA, heavily aromatic and so forth. So there is sometimes a difference between the cost for that and how these indices move. And effectively, this then means any plant that's using let's say FCC bottoms is potentially impacted by that. There's other kinds of feedstock we can use such as coal tar and that sort of things. So the biggest impact for us is the U.S., some in Europe and a bit in Korea as well.

Got you. Okay. And then maybe last question on, so guidance. If I take the midpoint of guidance, the 290 that implies $75 million of EBITDA per quarter, the balance of the year. And kind of it sounds like in your comments you expected gradual, bit of a gradual recovery, but that seems to be more of a snap back to me and some of that has to be sustained. And I know you mentioned through the December it tends to dip off due to seasonality. So how - I guess help me understand the pacing of how you expect the rest of the year to go? Do you expect earnings to move up meaningfully in 2Q versus 1Q and then further in 3Q? Just wondering if you can help me understand kind of the pacing of the recovery, the balance of the year?

Yeah. So that's why we put some comments in there about how we saw March and April and that those were strong months for us and an improving trend in those months. So I think we'll see it improved really beginning with Q2.

Got you. Okay. Thank you very much.

Thank you. [Operator Instructions] Our next question is coming from Chris Kapsch from Loop Capital Markets. Your line is now live.

Yeah, good morning. I was just wondering if you could just follow-up on the comments and the observations around the destocking having run its course and just provide some more granularity if you could. Is it in any particular region that you noticed this inflection? Is it tied to any particular end market? And assuming you're talking about MRG and/or Specialty, if you could delineate if there's any trends that have shown up for those businesses in your - I guess in your order demand patterns in it sounds like in March and certainly through April?

Good morning, Chris. You're absolutely right first of all, that's much less of a factor ever in the tire area just because of the volumes involved. So we've seen an increase. If we are going to look at let's say January, even January times too because we all know February is going to be a weak month and then we can compare that to March and April are really quite a substantial improvement there. I think that reflects just sort of broad-based across a number of different Specialty markets, but primarily in the higher margin ones, a stabilization, let's say, in terms of customer stocking levels. MRG is probably a little bit less pronounced. And I think we are seeing there also just simply end demand.

Okay. And then if I could follow up on the comments around differentials. So if I - this is something that became an issue, fairly pronounced issue I guess four years ago or so. And then with MARPOL coming on the horizon, there is more discussion about the potential dislocations associated with differentials. But I thought that this was addressed in clauses that were incorporated into your supply agreements to protect you and really the industry more generally from adverse differential. So if you could just address that why is this suddenly seemingly a little bit of a headwind that has geared up?

Yeah. So first of all, you're absolutely right. It is our expectation that our customers should compensate us for differentials that our sales team should go get that and we are absolutely committed to it. Obviously doesn't fill in right into an index in that sense of it and so it takes some work to go get it. But we are absolutely positively committed to go get these differentials.

And Corning, if I could just follow up on one other point on the - so just on the increased CapEx spend in North America tied to the EPA. Is this Orion specific or do you sense that other players are having to spend more money on tied to the agreement with the EPA? And I guess it was on page 29, it looks like if can make out that arrow. It looks like you have an expectation that North American supply would be down. I'm just wondering, if there is some expectation that because of these extra capital expenditures that the supply that somebody is going to rationalize or is that some capacity that's already been taken out? Thank you.

Thanks, Chris. So first off, you're playing into our competitive spirit, Chris, and I certainly hope our competitors are finding their own little challenges, but I can't speak to that. In terms of the trend of that arrow, it's intending to show just a slightly down trend saying that people are going to have to take outages to make the modifications to implement the EPA work.

Makes sense. Thank you very much.

Thank you. Our next question is coming from Laurence Alexander from Jefferies. Your line is now live.

Yes, hi. This is Nick Cecero on for Laurence. So on the Specialty side of things, it looks like you said you were expecting gross profit per ton to increase and you mentioned $400 to $700 per ton level. But I guess as you're moving throughout the rest of the year, is there a way maybe we see mid-$700 per ton and what would it take to get there?

So first of all, we're talking about where it's going to average. And I think there's going to be quarters where it's above and below that kind of range that I've gotten. Effectively, what it really turns on is mix and overall volume loading because that plays into fixed costs.

Understood. And then maybe just a second question. So there's been some commentary on China about them looking to reduce the number of approved chemical parks. And I was just wondering if it's come up in conversations already with customers either on products you sell or maybe some of the raw materials that you procure if you're already starting to see some impacts from that, some commentary around that?

Yeah, Nick. We have not really seen much impact from that.

Great. Thank you very much.

You're welcome.

Thank you. Our next question is coming from Dan Carroll from Inherent Group. Your line is now live.

Hey guys, good morning. Two quick questions, Charles, can you just give me a sense of the going forward impact of the Korean consolidation, is that, starts to lap over the rest of the year? And then now that you guys have had a couple of quarters of living with SN2A, you guys have talked about electric vehicle batteries being kind of a long term opportunity for that. Could you give us some sense of if you kind of quantify that in any way kind of how big of an opportunity for the company that could be? Thanks.

Sure. I'll take the Korean consolidation and then Corning will pick up on SN2A. We've got one more quarter, Dan with that 10,000 tons lapping. In other words, we closed, consolidated of the two plants in Korea at the end of June of last year. And so it be roughly 10,000 tons of volume that is rubber volume, low-end rubber volume which is missing as a result of that consolidation. And then in terms of the previous quarters will have lapped it and it won't long - any longer be a subject of discussion.

And to Acetylene Carbon Black and electronic vehicles, so this is something that could be really quite a positive for us. I'd rather not put a sort of pump story out there on how big this can be until it becomes more real. But you see many countries heavily incentivizing right now and making pledges about changing their automotive fleet. There's obviously a lot of challenges in doing that. But to the extent that happens that certainly creates a very large market opportunity. And as I said, we've bought our plant, we've fixed it up, we've got products in queue. It's not real until we're queued and customers are taking it and we're moving it and that's why I'm kind of - don't want to make statements here. But we see that as something we're on the path to get done and we're looking forward to it.

Great, thanks.

Thank you. [Operator Instructions] We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you all for your time today. We appreciate it and we wish you all a good weekend. Thank you.

Thank you.

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