Greetings, and welcome to the Orion Engineered Carbons Fourth Quarter 2019 Earnings Conference Call. [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. Thank you. You may begin.

Thank you, Operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss our fourth quarter 2019 financial results.I'm Diana Downey, Vice President, Investor Relations. With us today are Diana Downey, Chief Executive Officer; and Lorin Crenshaw, 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'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 as of today, February 21, 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 fourth quarter 2019 earnings conference call. I will start today's call by providing some general comments on our performance this quarter. Our CFO, Lorin Crenshaw, will then provide detail on our consolidated financial results and related matters for the quarter and full year. Then I'll come back to discuss the segments, 2020 guidance and share some closing comments. We will then open up the lines and be happy to take your questions.Turning to Slide 3. During the fourth quarter, we delivered adjusted EBITDA in line with our guidance despite an economic backdrop that remained quite challenging. We finished the year strong and provided an excellent proof point of the resilience of our business.Orion was not public during the last major downturn, the 2008, 2009 time period, and therefore, investors don't have as many data points for us as they do for other industrial companies that have been public longer. As a result, it's important to accentuate periods like 2019 when we experienced a significant deep -- downturn in our key end markets but proceeded to execute and delivered solid financial data points, showcasing the resilience of our business. 2019 represented a good test for our team and our business.Orion executed well in the fourth quarter as well, delivering adjusted EBITDA within our forecasted guidance range and strong cash flow from operations, while continuing to implement key initiatives to better position this company in this challenging macro environment. The continuation of weak OEM auto dynamics and the evidence of tire manufacturers conservatively approaching year-end contributed to the volume declines in the fourth quarter. However, favorable trends in price and mix helped offset some of the weakness.We delivered fourth quarter adjusted EBITDA of $63.2 million, with Specialty at…

Thank you very much, Corning. Now turning to Slide 8. Volumes were down 8.8% year-over-year and by 8.9% sequentially, in line with the trends Corning cited earlier, while adjusted EBITDA came in at $63.2 million, basic EPS at $0.32 and adjusted EPS at $0.42.Contribution margin per ton improved year-over-year due to positive mix and favorable feedstock cost development within Specialty. An important point I want to make on this slide is that every quarter, the contribution margin per ton fluctuates, primarily due to some combination of product mix, feedstock developments and FX as the earnings mix between Specialty and Rubber rises and falls. We will continue to talk about these changes and explain the dynamics quarter-to-quarter as usual. However, long term, we are less concerned about achieving a specific contribution margin per ton and more concerned about answering the question, how do we, as a leadership team, fundamentally and reliably raise the absolute earnings power of this business. How do we make this roughly $300 million EBITDA business a $400 million EBITDA business. The exact strategies we employ to accomplish that will result in a certain product mix between Rubber and Specialty. However, the point is, our focus will be on raising the absolute earnings power of our business in the coming years, with the primary governor being return on capital employed, not managing towards a specific gross profit or contribution margin per ton quarter-to-quarter.Slide 9 explains the drivers behind contribution margin, adjusted EBITDA and net income in detail. Starting at the upper left-hand side, contribution margin declined 3% year-over-year as the favorable impact of price and mix, mainly driven by our Rubber business, was eroded by a combination of lower volumes, negative feedstock differentials, FX and lower energy sales. From an adjusted EBITDA perspective, lower contribution margin and higher…

Thank you, Lorin. Moving to Slide 12. Our quarterly Specialty volumes were down year-over-year for the reasons I discussed earlier. Geographically, North America was the primary source of volume weakness year-over-year, whereas we actually saw growth in China, while Europe was flat. So overall, a mixed dynamic, reflecting the overall malaise of the underlying global automotive and polymer end markets.In contrast to the volume decline, gross profit per ton rose 18.2%, reflecting a combination of favorable mix, positive price, lower fixed costs and lower feedstock costs. I'm pleased with this improvement in this metric, but I would caution that both mix and year-to-year feedstock implications are quite dynamic, with mix varying quarter-to-quarter based on the demand across different grades and feedstock costs fluctuating.The next slide brings out the major drivers in adjusted EBITDA year-over-year, which principally reflect the same factors that drove gross profit in addition to favorable SG&A cost development.Now please turn to Slide 14. Rubber volumes were down 9.6% year-on-year and 9.9% sequentially, reflecting the factors I cited earlier, with weak end market dynamics and a conservative customer position evident in certain areas in the world. The reduction in gross profit per metric ton was not mix-driven, but instead driven by a combination of negative differentials, feedstock dynamics and lower energy sales, reflecting lower production levels.Slide 15 shows the development of adjusted EBITDA, with significant positive price impact, offset by lower sales volumes, unfavorable FX effects and negative differentials.On Slide 16, you'll find a summary of several key assumptions behind our 2020 guidance. What I'd like to do is provide a perspective and color on what we expect from price, volume, cost and cash flow perspective. Pricing will be a bright spot in 2020 for both businesses, but especially Rubber, reflecting a constructive resolution to our negotiations. We…

[Operator Instructions]. Our first question come from the line of Josh Spector with UBS.

So just in terms of your 2020 guidance, I'm curious if you could quantify how much you're baking into 1Q for the potential coronavirus impact?

Josh, thanks for being with us today. We've got mid-single digits in for coronavirus.

That would be mid-single digits EBITDA?

Mid-single digits millions of EBITDA. So effectively, clearly, this month is heavily affected. China, though, is getting back to business now, and we're seeing the restrictions on transportation so forth easing, customers restarting that we'd see some of that fall over into the next month, March, but that it would be limited to that.

Okay. No. That's helpful. And just also in terms of your guidance comments, you talked about feedstock prices and impacts being at levels similar to fourth quarter. I was wondering if you can kind of square that with your commentary about surcharges and potential lesser-impacted differentials into 2020.

So I think we have a slide where we show you what we think are sort of the rules of thumb of what we expect. From a differential perspective, we feel that we're now much more isolated from that impact. It's not completely 0, as I said in the prepared comments, but it's certainly a dampened impact -- significantly dampened impact compared to the past.

Okay. And I guess maybe just one more around that is, I mean, low-sulfur feedstock prices have generally declined pretty significantly from the end of last year, beginning of this year, to where we are now. That decline is not baked into any of your guidance or commentary you've given on the call so far.

So our current guidance is looking at -- as we see the market. Those have come down right now. Some of that, I think, is reflecting that, let's say, speculation in that market is somewhat behind us as IMO 2020 is now actually live and running. Some of it probably reflects all the blank sailings. And so we can kind of speculate to low sulfur. Surely, I think the speculation is over, we might see a slight dampening in the demand for that right in the moment. We'll have to see.

And Josh, I would just add that, on our Rubber business, these month-to-month dynamics, over the course of a 3- or 4-month period of time, given the way our pass-throughs are structured, it should wash itself out. And so month-to-month, you'll see these variations, but we've got pretty good coverage there, and over a period of couple of months, should wash itself out.

Our next question comes from the line of Mike Leithead with Barclays.

First, I guess, for a question on the outlook. I appreciate you don't give quarterly guidance, but just given some of the unique macro circumstances we're seeing right now and given that we're already about, call it, 2/3 of the way through the quarter, I was hoping you could provide a bit more color about how you're seeing the first quarter develop relative to your full year guidance. Just because I think there's some questions about the range in your guidance, and if we had a better sense of just kind of how you're thinking about the first quarter, it might better contextualize the overall year.

This is Lorin. I would say you should expect for the first quarter, a strong sequential increase. We're seeing a really good tone after the destocking has sort of subsided. And so you'd probably ought to think high single-digit percentage sequential increase from where we ended the fourth quarter. For the full year, if you take roughly the midpoint of our range and you think about the quarters or the year, you ought to look at a slight first half bias for the total company, a slight first half bias, and that reflects, on the Rubber side of the business, weakness in the fourth quarter as we always see seasonal slowdown then; and a slight first half bias to the Specialties business, driven by mix, volume; and for the overall company, driven by better absorption, just reflecting the way we're running our plants in the first half.

Sorry, so just to clarify, you think there's a mid-single-digit sequential improvement in EBITDA? Was that correct?

So from the fourth quarter to the first, you ought to expect a high single-digit percentage increase in our EBITDA from the fourth quarter to the first. Then for the full year as you distribute the midpoint of our range for the full year, a slight first half bias to the second half for the total company.

Got it. I guess what gets worse then in the back half? Because I mean, I think most people would think the first half -- and I appreciate there's probably some Orion-specific numbers, but 1Q will likely be the worst macro environment, particularly with what we're seeing with the coronavirus. So when you think about your guidance range, I mean, the low end of the range is actually below annualizing the fourth quarter of this year. So can you just walk me through kind of what gets worse in your guidance for the back half of the year then?

So there's two things. On the Rubber side of the business, we're anticipating the fourth quarter that will be weaker than the other quarters, as usual. And on the Specialty side, it's just an idiosyncratic dynamic. The first half for Specialties is going to be a little bit stronger than the second and that reflects volume, that reflects the product mix, where we've got some high-margin grades that are shipping in the first half. And overall, our absorption is going to be better in the first half of the year. So perhaps those are somewhat Orion-specific.

Lorin, congrats on joining.

Thank you.

[Operator Instructions]. Our next question comes from the line of John Tanwanteng with CJS Securities.

Nice job on the quarter, especially the Specialty margins, it's great to see that. And then I know with the context that these can jump around, but given that you're expecting a stronger mix in the first half, what products are driving that specifically? And kind of why does that fall off in the second half, as you mentioned?

So first of all, thanks for those comments, John, and -- that you just shared with us. So if you look at things like some of our more premium products that we see strength in the marketplace on that right now, and there are certain cycles sometimes that are going with that and where we see certain end markets moving, and so I think that's a big part of where we are. I'd say, in a -- just the movement of the premium grades and particularly in certain end markets, geographic end markets for us, that's what we see.

Okay. Great. And then, Corning, you've been talking about signing customers up on the RCB side for multiyear contracts for a little bit of time now. Anything to report on that front? Did you manage to accomplish that here in the '21 -- 2020?

We don't have anyone under, let's say, what I would call a true long-term agreement. We did successfully conclude one that went multiple years in the past and continues on that basis going forward. But in terms of one that's really out in, let's say, the 10-ish year range, we are in active discussions with people today, but we don't have that concluded. And it's one of these things where it's kind of hard to give an update until it's like done or one way or the other. So we continue to think this makes a great deal of industrial logic. I'd say our negotiating partners feel the same way. And it's just a matter of trying to get to an agreement that makes sense for everyone.

Got it. And just a little more clarity on that. Given that we didn't get one done before year-end in 2019, does that push the timer back out to the end of 2020 now?

Not necessarily, no. You could do something and starting it really at any time.

Okay, great. And then finally, Lorin, maybe can you discuss your free cash flow expectations for the year? Maybe your cash tax expectations or working cap changes at that either extreme of your EBITDA guidance range. And where there might be flexibility, if necessary, on the growth and other opportunities in CapEx.

Sure. First of all, I would say, as you think about the first quarter, we're seeing a strong tone to the business starting the year, and that's going to drive our working capital higher. And so we'll start the first quarter, and you'll see our net debt rise, probably on the order of, I don't know, $30 million, $40 million.What happens after that just depends on oil price dynamics in terms of do we get a windfall like we did last year from working capital or not. But we've got flexibility, and we express it in the form of that range. The $130 million to $150 million CapEx range and the percentages for EPA, non-EPA reflect the degree of the flexibility that we have within that Capex. What you saw this year was, in a weakening economic environment, the kind of stabilizers we expect from working capital actually did kick in, but we'll see what happens. But I would tell you, for the first quarter, you should expect a tick up in our leverage to reflect higher receivables, but we'll give you updates throughout the year.

And just while we're on that topic and talking about capital, there was a minor typo in our press release. And just to clarify, the Evonik indemnification, that applies to the EPA capital, which is about 45% to 50% of our CapEx for this year.

Okay. Great. Any thoughts on the cash tax expectation?

That's right, around 29% is where we're expecting for the year.

Our next question comes from the line of Kevin Hocevar with Northcoast Research.

Could you give a little -- talked several times about strong pricing in the Rubber business. If I look at the -- those EBITDA bridges you provide on your slide deck, it looks like, if I add up all the quarters, you got about $34-or-so million in the price -- base price and mix benefits in Rubber in 2019. So curious what that looks like in 2020.

Well, so we had a very good pricing cycle. We're happy with the outcome from it. It's a little commercially sensitive to go into exactly where those numbers came out for us. But I would say it was, all in all, a good year, albeit, just as I said before in the previous earnings call, we went with this as the airline seating pricing model, that when you're in a tight market, it's okay to have a couple of empty seats. And we did see some issues on volumes for us, but all in all, a net positive, a strong net positive.

Okay. And then the surcharges you talked about, could you just give a little color there? How quickly does that pass along feedstock changes? It sounds like you had -- you got these implemented in most -- you said the lion's share of your volumes. So is that on a global basis? And does it reverse out? I mean I think you had $13-ish-or-so million of differential headwinds this year, does it reverse out any of those and turn those into a tailwind? Do you claw any of that back as a result of this? Or is it really just kind of setting -- that's kind of the baseline year 2019, and now going forward, you just reduce that volatility by offsetting? I just wonder if you could just give some color on those surcharges.

Yes, Kevin, a couple of questions you've raised there, so let me take them sequentially. So first of all, 2019 is 2019, it's done. We closed the book side. And what we do now is really just looking going forward to a new set of contracts with our customers. There's always some timing issues between when we buy and how it gets sold and worked through our inventory and so forth. But effectively, in the same sort of pacing we have with our other elements of oil cost passed through, the same thing is there with differentials. We had essentially a very similar mechanism in place in Europe for a number of years. We now have that largely in place here in the United States, so that's a substantial dampening of that for us going forward. We don't have it across the board. We have, for example, some people who are on multiyear agreements that didn't come up this year. But by and large, we were very successful with that.

Okay. Got it. And sorry to beat a dead horse here, but I guess, I want to make sure I understand the first quarter expectations here. You said high single-digit sequential improvement in EBITDA, which get you closer to $70 million, just a little under $70 million. And then -- but bake into that is a mid-single-digit headwind from the coronavirus impact. So that gets you to low to mid-$70 million of EBITDA, excluding that, which seems like very strong year-over-year improvement in the underlying core business. I mean is that really the way? I'm thinking about that appropriately? And I know you've given all the reasons why so far, I just want to make sure I'm understanding how you're framing that up.

Yes. I mean, I think if not for coronavirus, we'd be looking at a very strong situation. We ended December in Asia with a high degree of momentum. As I said earlier, we think, in December, our tire customers drew down inventory, and I don't just mean Carbon Black. I think their own finished goods. We saw an upsurge in their orders in January and February. And so all that is quite positive. If you think about a year-on-year comparison, we were going through changing out some of our channel management issues in China a year ago. We executed that quickly. We've got it done. We think we're in a much better place there now. So all those are really strong positives for us. And I think we've put in that comment about coronavirus, and we've put it into our guidance just because I think there's a hunger for it out there. And that's how we see this. I don't underestimate this. I lived in Taiwan with my family during SARS, my kid got quarantined. I've been through it. But I think our feeling is and the feeling of our team on the ground is that China is getting back to business. This too will pass. We will move forward. And that's why we wanted to put in that. But if not for coronavirus, I think we'd have had a stronger Q1.

I would just add that, that is an estimate. Our team is doing -- we don't have any better information than the rest of the world, but we're doing our best to say, week-by-week, if we see a March normalization to our business, what would the impact be. We all know that it's just an estimate and doing our best to give you perspective.

Our next question comes from the line of Laurence Alexander with Jefferies.

This is Adam Bubes on for Laurence. It sounds like no upturn is anticipated in 2020. But thinking about 2021, once growth -- demand growth resumes, how should we think about incremental margins?

Well, first of all, Adam, welcome to the call. So clearly, incremental volumes are positive in any business with fixed costs, and so that would be a strong positive for us in that time frame. And we've got some capacity to be able to take in, I'd say, certainly, a year or two of recovery in that, so I think that would be quite good for us. I think at this point, we're not prepared to quantify. I think we have to see what and where and which markets and all of that.

But I would say that if you look at the bridges in our press release, we've got a contribution margin bridge in there that you ought to be able to back into some indication of what our contribution margins are, and they're pretty attractive. Okay.

Okay. Great. And then my last question is, just after the seasonal destocking you saw in the Rubber business, are you seeing signs of a restock through Q1 so far?

Oh, definitely. And let me say -- I think it was stronger than the typical destocking, and we think it was really quite aggressive on the tire side. And then we came into a very strong January set of orders. So I'd say that is pretty much confirmed.

Our next question comes from the line of Chris Kapsch with Loop Capital Markets.

Just a quick follow-up on that restocking comment you just made. The -- is that exclusive to the Rubber segment? Or are you seeing any restocking in the channel on the Specialty side thus far into the first quarter?

Chris, that was for sure, most pronounced in the Rubber area.

Right. That's very good. I know there was the destocking, call it seasonal, if you want, in the fourth quarter, but there's been kind of a prolonged destocking in the sort of the polymer supply chain, which you guys feed into on the Specialty side as well. So I'm wondering if there's any sort of recovery there that's visible in terms of either end market demand strength or restocking, but it sounds like not what you're characterizing.

And Chris, I'm glad you asked the question because Specialty is not seeing a sequential tick-up from the fourth to the first quarter. So that tick-up for the total company is on strength of Rubber but not Specialty.

Got it. And then Corning, coming back to the empty seat analogy. So understand willingness to walk on some volumes where you didn't feel like you're getting appropriate value for your products, but you also said you felt pretty good about the pricing that you got in North America. So I'm wondering if the volume that you faded, for lack of a better term, was that -- did it tend to be geographic in nature where some regions are more competitive? Or was it more customer-specific in terms of where you sort of walk from that -- those volumes?

Right. So speaking of Rubber, I would say the biggest impact for us in terms of, let's say, volume where we took hit was North America and somewhat in Europe. And that's a reflection of, I'd say, pricing negotiation dynamics really around individual customers. I mean that's the nature of this.

Got it. And then given that your -- you said 3% to 4% lower volume expectations for the full year. I'm just wondering what sort of impact you have baked in your outlook from absorption variances. Because you were talking about the sequential improvement in EBITDA. You'd said better absorption variances. But I would assume that on a full year basis with the lower volumes, you might see a penalty there. So if you could reconcile that?

Yes. On a full year basis, net of the first half, better absorption, you're right. On the full year basis, our overall fixed cost and S&A are a headwind. And although we have a first half dynamic where you have a little better absorption. For a full year perspective, you're right, it's negative.

You got it just nailed there, Chris. It's because Q1, in particular, is a lot stronger than a year ago, as we see it.

Okay. Helpful. And then finally, the -- on the causes to get sort of feedstock differentials passed through to customers, I think that's mostly on the Rubber side. I'm wondering in your EBITDA guidance range, is there -- if feedstocks sort of become less of a headwind on the Specialty side, is that a source for potential movement upward within your guidance range? Or because that's -- I guess, what I am...

Sorry, Chris, I didn't mean to cut you off. Keep going.

Yes. No, that's -- no, I guess what I'm asking is there's no pass-through mechanism for feedstock -- adverse feedstock differentials on the Specialty side still.

So first of all, let me answer your...

Specialty side -- yes, go ahead.

To answer your earlier question, so if that market improves, it's a net upside for us. We do have some ability to pass through differentials and so forth in the Specialty area. Specialty, I would just say, has been a more challenging and more aggressive pricing and let's say, a competitive negotiation environment than -- it's just been challenging. So it's been a little harder to achieve the same ends there. And that sort of makes sense because in a lot of these areas, we're selling a highly differentiated product, and it's really on a different basis.

Right. Fair enough. But the reason I asked though is because the way I understand it, and correct me if I'm wrong, but like in some of your assets that are dedicated to Specialty, you need the lower-sulfur feedstock, which is where some of the -- because of IMO 2020, the dislocation is most pronounced. So where you might need that protection in the form of pass-through clause. But -- that's what I was asking. I was going to ask you...

Yes. So it tends to be -- in Specialty, it tends to be the larger customers who are in perhaps a slightly less differentiated end of the Specialty spectrum where we have the contracts. And the people who we have in, let's say, the more highly differentiated areas, tends to be maybe a slightly larger number of SKUs for specific end properties they're trying to deliver. And those contracts are just, I think, by their nature, less linked to underlying indices like this. So I think it works out on a risk-reward return for all of us.

[Operator Instructions]. There are no further questions at this time. I'd like to turn the call back over to Mr. Painter for any closing remarks.

Well, thank you all for being with us today. We appreciate your time and attention and interest in Orion Engineered Carbons. Have a good rest of your day.

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