Ladies and gentlemen, good morning, and welcome to the Orion S.A. First Quarter 2024 Earnings Conference Call. [Operator Instructions]. A brief 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, Wendy Wilson, Head of Investor Relations. Please go ahead.

Thank you, Ryan. Good morning, everyone, and welcome to Orion's conference call to discuss our first quarter 2024 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, our Chief Executive Officer; and Jeff Glajch, our 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'd 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, May 3, 2024. The company is not obligated to update any forward-looking statements based on our 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 thank you for joining our call today. We started 2024 on a strong footing with adjusted EBITDA of $85 million, our second best Q1 behind only last year's results. More importantly, we saw underlying improvement in the business. Our specialty volume grew 19% compared with last year. At the same time, we increased our gross profit per ton from $492 in Q4 to $659 to a level more in line with normal margin levels. Rubber gross profit margins of $435 per ton were well above last year's average of $409 per ton. Prior to 2022, our rubber gross profit margins typically ran in the $200 to $300 per ton range. These results clearly show that our key markets continue to restructure, and this is the new normal from which we can build. As a result of our progress in both markets, we continue to expect 2024 to be another year of growth leading to record EBITDA. In summary, we're on track to outperform expectations in specialty and to exceed per ton margins in Rubber, despite a more challenging geographic mix in both markets. Digging deeper into Rubber, we expect strong demand in Europe, a weaker-than-expected demand in the Americas. We are confident that we can adapt to these changes with agility and remain committed to our guidance range of adjusted EBITDA at $340 million to $360 million, and adjusted diluted EPS of $2.05 to $2.20 per share, up 5% and 11%, respectively. In sustainability, we were recently notified that our EcoVadis rating has been raised from gold to platinum, the highest possible distinction. That means we earned a place amongst the top 1% of companies [accessed] by EcoVadis, one of the world's largest providers of business sustainability ratings. This ranking is quite prestigious…

Thank you, Corning. On Slide 5 are the consolidated results for the first quarter. Compared with Q1 last year, volume was up in both businesses with Specialty volumes increasing in all regions and Rubber increasing in Europe and China. Gross profit and gross profit per ton were down. If you recall, as we discussed last year, in Q1 2023, we had some timing and onetime benefits totaling $9 million. Those did not repeat. We also saw an adverse impact this year from the regional rubber volume mix with less North American and more China volume. On a sequential basis, all metrics were up, especially of note, a significant increase in gross profit and gross profit per ton, which was up 28% to $492. On Slide 6, we look at the EBITDA drivers. Stronger pricing and volume in Rubber was primarily offset by poor regional mix. On the cost side, the $9 million impact in timing and onetime items from last year, as previously noted, higher labor costs and operating costs as well as less benefits from cogeneration. On Slide 9, Rubber volumes increased in Europe where we are already seeing the benefit of the upcoming Russian carbon black ban as well as in China, but this was mostly offset by lower demand in the Americas. Compared with Q1 last year, we experienced lower gross profit per ton despite strong contractual price increases. This was due to the timing issues previously mentioned. Poor regional mix, namely the weaker North American volume, higher fixed costs and lower cogeneration pricing. However, Q1 gross profit per ton of $435 was well above last year's average of $409. Reiterating what Corning said, we expect this higher level of gross profit per ton to continue across 2024. Slide 8 shows the impacts in a waterfall chart…

Thanks, Jeff. We're off to a good start, and I expect this to be another record year. Turning to Slide 13. We're reaffirming our guidance. Based on current conditions, we project 5% EBITDA growth in 2024, and an 11% increase in EPS. This would be our fourth year of growth. Let me close with a few points for you. First, the industry restructuring, which has been underway for years will continue. Tire factories, new tire factories continue to be announced in North America and in Europe. The EU ban on Russian Carbon Black starts in 58 days. The risks of a far-flung supply chain are obvious. The supply-demand balance continues to move in our direction, and a strengthening polymers market also tightens the rubber carbon black supply and demand curve. Second, Specialty demand is recovering. Third, our LaPorte facility is on track for mid next year, providing additional opportunities for expanding Specialty margins. And fourth, we take capital deployment seriously. We are committed to increasing free cash flow, maintaining a strong balance sheet and deploying your capital wisely, providing increased returns through investments like La Porte, buying back shares or by reducing our leverage. And Ryan, with that, please open up the lines for questions.

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

Corning, I was wondering if you could talk a bit about the volume trends that you're seeing in the market today and kind of some of your forward expectations. So I think in your comments seem pretty optimistic or maybe more upbeat on where demand is at. But it's pretty clear that your guidance assumption assumes no improvement. So how have things changed? And how does that compare versus what's baked into your guidance?

Sure. So we have never said that we saw for this year like a hockey stick necessary to achieve our guidance, nor do we really think there is the confidence in the marketplace to do that. That said, in Q1, there's positive developments in it. I'd say in the Specialty area, it's really quite broad across the market. So for example, some of the higher-margin areas like coatings, distributors who are often serving coatings margins are customers, those are very high. But so are things like thin film, pipe and so forth. And so you can see that balance in how our GP per ton has developed in Specialty. Broadly speaking, we think that it's going to be continuing down this path. I don't see customers being able to really stock up and restock in a big way. But I do think the fear of inventory and that sort of thing is down a bit. On the tire space, you see, for example, in the North American market, increased purchase of tires and that's in the mid-teens, but you see tire production only up maybe like 4%. So they're still suffering for imports. We're still seeing the trucking volumes, while maybe now bottoming, they haven't really come back stronger. So over the course of the year, it's possible that trend, I think, has stabilized, and we'll have to see the rate at which it improves from here. We do need a little bit of improvement, right, from an $85 million run rate to hit our guidance. So there's some growth expected in our numbers.

Yes. And I guess maybe on that last point, I guess, trying to take a little bit more near term here on the second quarter. You had some pretty easy volume comps in Specialty and Rubber. And I mean, there was some noise in the first quarter from cogen credits last year. But I guess a simple way to ask this is, do you expect EBITDA up year-on-year in 2Q with the higher volumes with some maybe improving profitability in Rubber, or are there other offsets we should be considering?

So I think on a clean run rate basis, I think that we're in a good position for next year with improved margins and improving Specialty market. Does that help, Josh?

A little bit, I guess, try the other [indiscernible] just on second quarter. I mean, I think volumes could be up something like 10%. I assume that would lift earnings year-on-year. What would be wrong with that thinking?

Just in terms of last year where -- and I'm doing this without having looked precisely at that for you. But I think you have to think about what the power rates were last year and any other sort of timing impacts that can flow in and out of our P&L. So for example, if a particular input costs moved sharply and quickly, and that's the kind of thing that can have a lag in our pricing models. I mean, in general, I mean so -- Josh, I'm not trying to be downbeat. I think that we'll be looking at a stronger quarter in Q2. I think that's implied in our guidance without giving out specific numbers.

And Josh, this is Jeff. Just one additional thought, if you think about the midpoint of our guidance relative to the last 3 quarters of last year were clearly -- whether it's in one quarter, but certainly over the course of 3 quarters, we've got to have significantly higher EBITDA in the last 3 quarters to hit the midpoint of our guidance. We would have to be a $265 million in last year. In the last 3 quarters, we were at roughly $230 million, $231 million. So there's a pretty significant ramp over the 3 quarters, whether you see some of that second quarter or it's more back-end loaded, we'll have to see. We did have -- if you look at last year, we did have a bit of a stronger second quarter and then the third and fourth quarter weren't nearly as strong. So you perhaps would see more growth in the third and fourth quarter year-over-year.

Our next question is from the line of John Roberts with Mizuho Securities.

It's been a while since we've had kind of normal seasonality, I guess. Would you characterize the Q-over-Q, the March quarter versus the December quarter, 10% volume growth overall, 8% Rubber, 15% Specialty, normal seasonal pickup, or better or worse than normal seasonal?

I would describe the Specialty as a little bit better than normal. I looked back over the time. There were a few times and we had a bigger, let's say, EBITDA step change, but that's when we saw, let's say, power prices really move sharply in Europe or a special circumstance like that. So I put the Specialty at a little bit better than your normal seasonality.

And then industrial rubber has a fair amount of automotive OEM exposure. And it seems like, at least in the developed markets, North America, Europe, auto OEM has slowed here. Are you seeing that in your industrial Rubber products?

Well, as I said, we see North America a bit slower and some of that is probably in the OEM space. Some of that I think is I'll suggest the impact of import tires on the replacement market. And it's difficult for us to tease out exactly where that is. But I'd say North America, a little bit less. In Europe, I'm not saying the [tighter the] market is like that dramatically better than North America. It's just I think the Russian ban has really tightened things up.

Okay. And then lastly, I know China is not that big, but you've got new capacity there and you sounded pretty upbeat about China. It's confusing, I think, to a lot of companies, what's actually going on. What's your read in the sustainability of the strength in China right now?

So I think sectors of the Chinese economy that are really set on exports. You can look at, well, is there a recovery in European consumer demand, North American consumer demand, that kind of thing. In general, like maybe it's like the story of the purchaser matters index, right? It's like slightly above 50%, but not much. So I think it's a slightly improved situation and sentiment from where like when I was there last in November, but I don't think -- I don't -- I wouldn't read into that, but it's extremely bullish for that there isn't still some negative sentiment in that market.

Our next question is from the line of John Tanwanteng with CJS Securities.

I was wondering if you could talk a little bit more about pricing and the remaining capacity you have in '24 ahead of this Russian import ban. Exactly how much upside are you seeing there or movement, I guess, are you seeing there first in '24 and two, is it impacting '25 pricing negotiations if those have started yet?

Sure. So in Europe, specifically, a lot of the -- let's say, premier tire brands, they had already locked in their supply and they've locked in their supply without Russian Carbon Black. So I'd say it's more a play in the second area. So I see -- we do see opportunities to pick up some additional volume there. Competition is really with Indian supply in that space. So it's a positive environment. It's not like it's unchecked positivity, I would say. And I think definitely all this sets up for a very strong negotiation for next year.

Okay. And have those discussions started yet for next year? Or is that later this year?

Oh, yes. I tried to make that clear in -- so some people are in the framing, some people talk numbers. So that's [indiscernible] already.

And also, congratulations on the platinum rating. I was wondering if that impacts your pricing ability? Or is it just more nominal at this point?

I think that for many of our customers are really concerned about sustainability, and that is their preferred metric for sure. So I think it really is just another validation that we're a leader in this industry, that we're a supplier you can count on and count on for the long haul. And that sense of reliability and long-term commitment surely is worth something in this. And I think people have learned the risk of not paying the -- not unlocking up serious suppliers. So I think it's a net positive for us.

Okay. Got it. What areas do you still see weakness in? And kind of what are the prospects for improvement in those areas as you go through the year?

Yes. Well, I would say North American tires is still a weaker area. Tire purchases are up much more than manufactured. So, [let me] clear, what I mean we say North America tires, I mean North America tire manufacturing to a certain very European tire manufacturing, and this then relies on the brands with really a better cost of ownership value proposition to customers, start earning back people's business, as people adjust to the pricing changes that have happened in the market, and incomes are up, and people sort of accept the new normal. I think that's a big opportunity for the marketplace. I mean, in general, the -- in the specialty area, almost every market is up some more than others. So for example, in North America, if offshore wind and grew 2.0 and connecting that far-flung wind -- on land wind farms as that progresses, that's the kind of thing that would increase demand in that particular market, that sort of thing. Does that help, John?

It does. And then finally, just an update on capital allocation, you mentioned was important. I'm just wondering where is it most likely that you deploy excess cash in the next 6 to 12 months?

All right. So when we think about capital allocation, we think -- number one, just in terms of a framework about what's our cash flow, what are the other uses for cash. We also think about our share price, relative to different ways of valuing and thinking about what the share price should be. Of course, the balance sheet and not just the balance sheet today, but what are the exposures to that working capital, as Jeff mentioned, with the oil prices, that sort of thing, and significant milestones such as [indiscernible] for start. So we were not in the market in the first quarter. And I think -- if things play out relatively stably for this year and continue the trend, we're likely not to be in the market. We do definitely see the share price is significantly undervalued in a really good opportunity. With the EPA spending, we don't have that draw on us and we do have positive cash flow, but it's not of the magnitude that we really like. We did see our balance sheet, the ratio move up to 2.44. That's really an artifact of TTM effects. But nonetheless, that was a little bit higher. So on the balance of that, I think we're unlikely to be in the market this year, but things change as the year plays out.

[Operator Instructions] Our next question is from the line of Josh Spector with UBS.

I got to try again. So I'm definitely reading here that you don't want to be specific on 2Q, but I do want to walk through some of the moving parts, I guess. Because obviously, first quarter had the cogen impacts that you specifically called out. Europe gas was higher last year, but it was flat through the quarter. Oil was lower last year. It's higher now. So I'm looking at trying to think about the energy side of things. Oil is probably a little bit of a positive, that gas, I mean, as it relates to Specialty, it's probably a little bit of a negative. Is there anything we should be looking at outside of volume growth that should be drivers there? And I guess I'll ask again specifically if 2Q EBITDA could be higher year-over-year? And I'm focusing that there because, obviously, the second half of last year, the comps are easy. I mean I would hope you're going to be higher year-over-year. 2Q is the more informative of the run rate for us, which is why my focus is there. So any additional color would be helpful.

Josh, this is Jeff. Let me give you a little more clarity on Q2 last year, just to get us all on the same starting place. So our EBITDA last year in Q2 was $87 million. Included in that was about $4 million of onetime items, which I think we discussed in the call last year as well as we had some cogen benefit because of some forward sales and power that we had set up in late '22 that benefited all of '23 that across the year is probably about $10 million. So you can kind of think about that as $2.5 million a quarter. So between that $2.5 million and $4 million the operating result last year would have been right around $80 million. I just want to get us kind of balance in the same place there.

So do we expect to exceed that number? Yes, we do. Do we necessarily think we're going to blow past [ 87]? Well, we certainly aspire to. But there's that element. There's the forward power sale that we've talked about before, but just to remind us, that's in last year's numbers.

Yes. So I guess, I mean, if I look at the earnings per ton and assume that some of that's baked in, we think specialty normalizes year-on-year, maybe slightly better than the first quarter Rubber, you have some benefit. I guess the other piece of that comes down to volumes. I think [indiscernible] asked about it before a little bit, but year-on-year, there's an easy comp that should be up 10-ish percent. Is that a fair way to think about it?

Well, I would say if we take the pieces, I would expect specialty GP per ton to continue to improve from where we are today. I would expect the Rubber GP per ton -- more or less hold where we are just because the majority of the contracts are locked in at this point. And so yes, volume growth from there as the year progresses on a modest level is sort of what takes us into higher levels. Jeff, anything you want to add?

No, I think you hit that well. We will continue to see weakness in volume in the Americas, we believe. But again, that's built into the GP per ton number that we gave you.

I appreciate that. I do want to ask one beyond focusing on 2Q. On the La Porte project, I mean it's good to see the groundbreaking. I guess when I look at that start-up within a year of groundbreaking seems pretty clear. So I guess there's two questions with that is one, the level of comfort or maybe buffer baked into that timeline for us to be actually running and commissioning, call it, 12 months or less from now? And then two, how do you see that [indiscernible] plant ramping up? And what does that mean for profitability over '25, '26? Do we have muted profitability because there's start-up costs and other things in '25? Or do we actually start to see that in the second half?

Josh, excellent question. I was wondering if we're going to get that about groundbreaking and then commissioning just a little bit more than a year later. The majority of this plant is being built offshore and super modules. It's, I think, a leading manufacturing technique. It derisks a lot of the cost inflation that you see in the U.S. Gulf Coast and labor availability. We are right on the Houston Shipping Canal. So this site is a great opportunity to use those techniques. And that's really where -- how the bulk of the plant is going to come in. And that's all on schedule. So I think we feel really very good for that. Those modules will be coming in late this year. So we do expect to be in start-up, let's say, mid next year, that kind of thing. Then I do not expect any financial contribution in 2025 from La Porte at this point. I think the qualification process is going to take some time. And the higher the differentiated product, the higher the margin you're striking to achieve, the longer it takes. And I would say well into 2026, I really wouldn't expect a big contribution.

Ladies and gentlemen, as there are no further questions, I now hand the conference over to Corning Painter for his closing comments.

Well, thank you all again for your time today. As [an industrialist] and myself, I'd just like to thank you all for the trust that you've put into us. And thank you again for listening and for the thoughtful questions that we received as well. Please reach out if you have any further questions, we'd really be happy to hear from many of our investors. Thank you all, and have a good rest of your day.

The conference of Orion SA has now concluded. Thank you for your participation. You may now disconnect your lines.