Greetings, and welcome to the Orion Engineered Carbons Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Wendy Wilson, Head of Investor Relations. Thank you, and over to you, ma'am.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss our second quarter 2022 financial results. I'm Wendy Wilson, Head of Investor Relations. With us today are Corning Painter, Chief Executive Officer; and Jeff Glajch, Chief Financial Officer. We issued our press release after the market closed yesterday and we also posted a slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during the call. Before we begin, I would like to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the SEC and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, August 6. The company is not obligated to update any forward-looking statements based on new circumstances or revised expectations. All 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'll now turn the call over to Corning Painter.

Thank you, Wendy. Good morning, everyone, and welcome to our earnings conference call. I'm going to start with two of the slides from our Investor Day. First, on Slide 3, our strategic roadmap remains unchanged. It will continue to be our guide as we shift our capital spending from EPA compliance to financially value-added activities. Our new conductives facility is a prime example of this strategy in action. The conductives facility will expand our production capacity by approximately 12 kilotons per year, quadrupling our capacity for acetylene-based material. Within investment in the range of $120 million to $140 million, we expect sustainable EBITDA levels of $40 million to $45 million. Our conductive additive products are in high demand, not only for their purity, but also their performance. We view this specialty material expansion as timely, strategic and a growth accelerator. With approximately $15 million to $20 million of EBITDA generated from our conductives business in 2021, we aim to grow our earnings capacity to the $170 million range, when this project is completed. Today's high oil prices only strengthen consumer interest in EVs, further increasing demand for conductive carbons, whatever the business cycle is in 2024. The conductives project is an addition to our greenfield project in Huaibei, China. Here, we have had zero recordable injuries and over a million construction hours in the field. We are also ahead of schedule, despite the challenges with COVID. Well done to the team. This plant will produce 65 to 70 kilotons per year of specialty and high-performance carbon black starting in 2023. By the end of this year, we expect to have completed the debottlenecking work listed on Slide 15 and our ultimate air emissions upgrade in the United States and we should be in commissioning at Huaibei. This greatly reduces the…

Thank you, Corning, and good morning, everyone. If you could move to Slide 6, you'll see that our revenue stepped up both year-over-year and sequentially. This was driven by passing through higher feed cost stocks, realization of price increases, both on the 2022 pricing cycle and those we have passed on to our customers to cover rising energy costs. In addition, as Corning noted, we have improved mix, particularly in the specialty business. Higher gross profit per ton, which we believe is a key measure of our business is up over 8% compared with last year and up slightly compared with Q1. Adjusted EBITDA increased year-over-year and from the first quarter, resulting in record first half results. As I discussed at the Investor Day, while we do see an increase in EBITDA dollars with increasing oil prices, it is dilutive to EBITDA margin. We are showing an adjusted EPS today, since you may recall in Q2 of 2021, we received a cash payment of $79.5 million from Evonik related to our EPA investments and that skews the year-over-year non-adjusted EPS comparison. Moving on to Slide 7. Looking at our second quarter results, this was a great quarter for us, with revenue and gross profit, both increasing. Adjusted EBITDA an 83.4% was up 5.8%, compared to last year. Additionally, on a TTM basis, gross profit per ton continues its steadily increase over the past year, driven by mix in the specialty business. As we discussed during the Investor Day and for the reasons Corning mentioned earlier, we have entered a period where demand likely outstrips global supply, so we believe we're in a position of strength, even as the global economy stalls. We have been working to find solutions this year to support our customers, given the tight global capacity relative…

Thanks, Jeff. Our pricing has kept up with significant inflation. Our major projects are progressing well and we've upgraded the quality of our specialty business. Beyond the conflict in Europe, we have experienced increased demand in our Rubber business and realized the benefits from our contracted pricing cycle for 2022. The 2023 pricing cycle is well underway and we are verbally close with a few customers on multi-year agreements. While some specialty markets have softened, results continue to be strong. With that taken into consideration, we are maintaining our full year adjusted EBITDA guidance range of $310 million to $340 million, reflecting the momentum we achieved in the first half of the year, as well as the impact of current market conditions. We are also maintaining adjusted EBITDA guidance for 2022, within a range of $2 to $2.35 per share. Our guidance anticipates sustained demand, particularly for Rubber Carbon Black, despite an uncertain global economy and inflation pressures. We balance these challenges with our operating performance and confidence in the demand drivers we mentioned earlier in the call. Turning to Slide 15. We shared this slide with you in the first quarter, but believe it is worth repeating, it lays out the shift in our capital expenditures to growth projects, and what the near-term benefit is expected to be. Note that we have approximately $50 million of U.S. air emission control spending remain. In closing, I'd like to leave you with a few thoughts. First, for the reasons we outlined earlier on the call, we are entering a period where the supply and demand balance works in our favor, despite what might happen in the global economy. Second, the 2023 Rubber contract negotiations are ahead of the normal pace and we expect a very positive results this year. Third, we have the majority of the projected EPA air emission control spending behind us and are entering a period of spending for growth and higher returns to shareholders. With our demonstrated earnings power, we expect to have significant discretionary cash flow in 2023. Fourth, while European natural gas supply is a real concern, we are advancing contingency plans with an aim to at least reach the 15% gas reduction mark. With all that taken into consideration, we remain on track to achieving our mid-cycle adjusted EBITDA capacity goal of $500 million by 2025. Thank you. Operator, please open up the lines for questions.

Thank you very much, sir. At this time, we will be conducting a question-and-answer session. We have a first question from the line of Josh Spector with UBS. Please go ahead.

Yeah. Hi. Thanks for taking my question. And just kind of a couple ones around margin. So within Specialty, I mean, really impressive margin performance. You mentioned, do you expect that to go down sequentially? I guess, I'd be curious how much of that is, was a temporary benefit in mix versus some of the weaker markets, maybe you're not selling into there. And I mean, you're spending a lot of capacity into specialty markets, if you could capture that mix with your current asset, I guess, why wouldn't you expand less and capture that more? Is there a reason why you can't do that?

So, first of all, if we look at where we're expanding, which would be our premium areas and things like conductivity, I’d like to be clear, we can sell all the conductive additives we can make right now, that's going very well, let's say in the lithium-ion space, the premium area in that area. So I think there is no question, that remains a real positive for us. Where we see the weakness is in the lower ends of specialty areas like masterbatch. Our customers tell us, there's a lot of -- price competition in masterbatch right now, and just that the market is weaker. So I think as we look forward, I wouldn't want to say, margins as high as the GP per ton this last quarter is what you guys should model. But I do think that we'll see, let's say, the lower end remaining more challenged as we move forward. Does that help?

Yeah. That helps. And I guess, just to follow-up on that same line of thought then. So if that's more challenged and if masterbatch has a lower margin profile, I guess, would you proactively deselect from some of those markets? And maybe slow some of your longer-term expansions to improve the mix, or is that not feasible?

Well, so like, if you think about what we're doing in La Porte for the acetylene, the reactors that make this lower grade specialty, we might go and switch this to rubber, but we could never make like that grade of a conductive material in it. There is real differences in the different reactors. So we can think about when we absolutely do, how do we want to allocate our reactor time, reactor by reactor and there's things we can do. But just to be clear, the ones that are, where we see the slowdown are pretty different from the high premium markets in terms of the nature of the material.

Okay. Thank you. I'll turn it over there. Thanks.

Thank you. We have a next question from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Hi. Good morning. Thanks for taking my questions. And it's exciting to hear that you're signing these multi-year contracts. I think that's a combination of a lot of work you guys have been doing, so good work there. My first question is, you confirmed the range in guidance, but I was wondering if you're expecting to be higher or lower in the range compared to three months or six months ago, especially given all the moving parts with, currency inflation, your voluntary gases (ph) reduction. Just help us understand which side of that equation you're angling towards now?

I'd say, we're tracking really towards the dead center of that as we look at it. There's things that could push us up. Those would include like, a really strong December and that could well happen in the Rubber area, in particular, maintaining the mix and your high margin in specialty and just continued good execution on stream of the plants. At the lower end would be maybe an earlier adaptation of, for example, a 20% cut, maybe a weak Q4, the economy continues to slow down, that sort of thing. But yeah, I think we'd see that guidance range is solid.

Okay. Great. And then just to drill a little bit deeper into the curtailment. What are the other fuels that you're converting to? Is there a cost associated with that? And is it something that we need to think about as a ramp-up in delayed process with the qualifications that you talked about might be occurring?

Yeah. I think that, that will be manageable. I think things are tight, people will work with us on the qualifications, and there probably isn't going to be a huge change in the nature of the product that we're making, we will have to see. Most of the fuels will cost a little bit less the natural gas, you shouldn't be thinking that's going to capture a huge margin to us. We basically pass through everything to our customers. So we have economies there. We fair share (ph) right, we would pass that through as well. So I think it's more just a view of, we've got stability, we've got plans, we can deal with this. We don't use natural gas in many parts of the world. We're on our way. Not that it's zero risk, but I think between the prioritization and the work we've got going, it's at a good place. And for that reason, we want to just give you those bounding’s of, hey, what could be the impact at 20% or 40%? Just so that, like the risk factor, you guys have a sense of what the boundary conditions are there. Does that help Jon?

It did. I get that the run rate impact. I'm just trying to get a sense of more of the one-time conversion cost and I guess, related to ramping up to speed?

Yeah. I don't think that they're necessarily going to cost more. I mean, natural gas is pretty dear right now. So I think -- the liquid fuel prices per amount of contained energy are typically in Europe less than natural gas. So conceivably, right, there is cost savings in this by doing it. So I mean, it makes sense in any case. I do not believe running your company on hope that, we're not going to get your tail or whatever, right? We run ourselves thinking, hey, a recession is coming, natural gas curtailments running, let's be ready, let's be ready. In this particular case, those same things could well help us to be more economical in this coming winter in Europe. So I don't see the conversion, yet one-time costs. But for right now, the alternative fuels by and large, would be more cost effective.

Hey, Jon. Just to clarify that the investment level is small for these changes. I think the important thing is that, we've gotten ahead of it. We're being proactive here. And that the reason we believe the impact to profitability of a 20% reduction in natural gas usage in the EU, is not by happenstance, it's because we've been proactive and we're looking at how do we make these changes now, that once they're forced upon us so perhaps. But again, the investments to do so are fairly minimal.

Got it. Thank you, guys.

Thank you. We have next question from the line of Josh Spector with UBS. Please go ahead.

Hi, there. Thanks for let me back in. So just a follow-up on Rubber Black. Kind of similar line of thought on the margin progression. I guess, you had a higher volume sequentially. You guys are getting pricing, but EBITDA and EBITDA per ton were lower sequentially. I think, we thought that could be maybe in the mid-200s came in closer to 200. Was there anything one time you call out in the quarter? You talked about some maintenance? And I guess along with that, how are you thinking about the earnings cadence for Rubber Black through the rest of the year?

Yeah. I think there were -- I think one of the headwinds we have, of course, that was on the FX side. I think that's a big one. I think as we look forward at Rubber Black going -- for the rest of the year, I think the GP per ton perhaps is in range, maybe a -- probably in the range of 310 to 330. Looking forward, we are at 315 in the first half of the year, so in the same ballpark.

Okay. Thank you.

Thank you. We have next question from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Hi. Thanks for taking the follow-up. I was wondering if there was an update on your CapEx expectations for the out years, just given that steel prices are falling and if there's been any change in the expected cost there? And what does that do to your free cash flow expectations that are going forward as well?

Well, I'm forward to the fact that steel prices and other things may come down. And that could be a benefit for us and report, but we have not updated that at this point.

Okay. Great. Just remind me if you expect to be free cash flow positive next year, with the investments that you're doing?

Yes. We do. Definitely.

And in that case, are you exploring the idea of other capital allocation, like buybacks or M&A and other things that are beyond organic growth?

Jon, thank you for that. Because it would have been like an unusual call if we didn't talk about buybacks. So like we as a Board, see the stock as extremely attractively priced, undervalued. And in that sense, a buyback would make a lot of sense. I think as a Board, we also just feel strong, fiduciary duty, thinking about a recession and thinking about the EPA capital spending is trending down, not quite over. And just really, in a sense of caution, have obviously not done anything in that sense this far. But that's something that we will continue to evaluate and I think is a possibility for us next year. And ultimately, that'll be a full board decision on which way we go. But when we say that, we'd use that free cash flow for strategic projects, and for increasing shareholder value and returning cash to shareholders, clearly, the buyback could be one of the opportunities for us to do that.

Great. Thanks, Corning.

Thank you. I now turn over to Wendy Wilson for the questions received via email.

Thank you, operator. We've got a question here that came in that we haven't addressed yet on the call. And that question is around year-over-year second quarter EBITDA on a constant currency basis.

Sure. Thanks, Wendy. If we had not had the impact of a stronger U.S. dollar, the impact of Q2 this year compared to Q2 last year was about $9 million, $9.5 million negative to us. So that obviously hurt the second quarter compared on a comparable basis. Another data point that I'd probably put out there is, had the FX rates stayed constant in the second quarter, compared to what our expectation was in the first quarter. It was probably a $3 million to $4 million impact on the sequential basis also.

Thanks, operator. If we don't have any more questions, I'll turn this back over to Corning.

Okay. Hey, thank you all for joining us today. We had relatively few questioners, but they were high-quality questions. And I think got the issues out for people. So Josh and Jon, thank you for that. Just a reminder to everyone that we're going to be presenting in a few upcoming conferences and traveling around the U.S. this fall. And after like basically two years of pretty much doing this virtually by Zoom, I'm really looking forward to getting out on the road and seeing some people in the flesh going forward. So we hope, we have the opportunity to see everybody on this call in the near future. Thanks very much for your interest and your investment, and have a good rest of your day. Thank you.

Thank you very much, sir. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.