Greetings, and welcome to the Orion Third Quarter 2024 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, Chris Kapsch, Vice President of Investor Relations. Thank you, Chris. You may begin.

Thank you, Devin, and good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion. Welcome to our conference call to discuss third quarter 2024 results. Joining our call today are Corning Painter, Orion’s Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. We issued our 3Q earnings results after the market closed yesterday. We have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call. Before we begin, I am obligated 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 Securities and Exchange Commission, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, November 8. 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 the call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the quarterly earnings deck. Any non-GAAP financial measures presented in these materials should not be considered as alternative to financial measures required by GAAP. I will now turn the call over to Corning Painter.

Good morning and thank you for taking time to join our call. We genuinely appreciate your interest, and we believe there are many positive things to discuss today. Our agenda includes my discussion of Q3 results at a high level, adjusted guidance and the contributing drivers, the current market backdrop and then some factors that will contribute to earnings growth next year. And we are encouraged about our prospects for 2025. I’ll also touch upon capital spending, free cash flow expectations and our capital allocation intention. I’ll then turn the call over to Jeff Glajch, who will walk you through our third quarter results in more detail before some concluding remarks and a Q&A session. Starting on Slide 3 of the earnings deck. We delivered adjusted EBITDA of $80 million, a 7% sequential improvement and 4% higher year-over-year. While pleased with this growth, these metrics do not really put the achievement in the proper context. GP per ton is good. Our production has improved. Quality is good. The single biggest thing holding us back is Rubber segment demand in the Americas and EMEA. The $80 million of EBITDA we delivered was our second best for any September quarter, just $400,000 shy of the best ever performance for Q3, which was in 2022. Notably, that year benefited from a particularly high cogeneration contribution in Europe where electricity prices climbed as a result of the war and related energy market uncertainties. The third quarter’s performance was despite overall company volumes being down a little more than 3% sequentially and 8% year-over-year. Our Rubber segment endured 11% lower volumes compared to a year ago. That variance alone equates to roughly 20 KT or our additional $8 million to $10 million of EBITDA drag in this year’s Q3. One further point, U.S. tire production…

Thank you, Corning. On Slide 7, Orion generated $80 million of adjusted EBITDA during the quarter, an improvement of 4% year-over-year and 7% sequentially despite 8% and 3% lower volumes, respectively. Our 6% year-over-year gross profit per ton improvement was partly from the favorable 2024 contractual pricing within our Rubber segment, but also a function of better absorption, variances and positive regional mix within our Specialty segment. The year-over-year EBITDA improvement was driven by better contractual pricing despite weaker Rubber segment volumes. Our adjusted net income and diluted EPS, respectively, increased 12% and 14% on a sequential basis, outpacing the adjusted EBITDA improvement, thanks to a more favorable tax rate, which was related to jurisdictional mix. On Slide 8, we show the company’s year-over-year adjusted EBITDA bridge. As you can see, cogen no longer represents a challenging comp from the prior year period since power prices have stabilized. While the overall contribution across both segments was relatively flat, there was a benefit from regional volume mix within our specialty business that offset the decline in Rubber segment volumes. The price mix component on the bridge is primarily the year-over-year benefit from the 2024 rubber contract agreements. In the cost and others bucket, better absorption, variances and certain timing benefits roughly offset other costs, including inflation and a transient drag from the inventory revaluation, which was related to the recent decline in oil prices. On Slide 9, looking at the Rubber segment’s performance. The main story here is our improved profitability metrics, both on a year-over-year basis and sequentially despite the absence of stronger volumes. EBITDA was up 3% compared with last year and 12% sequentially despite Rubber volumes declining 11% year-over-year and 3% sequentially. As Corning described, our tire customers simply have not taken as much tonnage as they anticipated…

Thanks, Jeff. Slide 14 picks Orion’s revised guidance for the full year, from which you can refer our fourth quarter adjusted EBITDA expectations are around $70 million, which would be our best fourth quarter ever. As discussed in our latest – as discussed, our latest view reflects a cautionary stance for many customers. October was a solid month with overall company volumes up modestly both year-over-year and sequentially. Our customers are signaling a more pronounced seasonality this December. All of this said, we have a lot to be encouraged looking into 2025. As I said in the beginning of the call, and despite the negativity in our share price, we believe we are driving many positive developments in our business that will translate into higher earnings, returns and free cash flow, simply lowering capital spending, coupled with our business trajectory for 2025 would have a significant impact. With that, Devin, let’s open it up and take some questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Josh Spector with UBS. Please proceed with your question.

Hey, guys. Good morning. So I want to touch on the Rubber – I wanted to ask on the Rubber side first. So I guess, when you look at volumes today this quarter, last quarter and your comments around growth for next year, would you say your volumes are at a trough, meaning you don’t expect imports to be another negative impact into next year or something else in that regard? Your volume gains are from contract wins. And can you just square all this with your comments around flat gross profit per ton was there some spread or price given up to gain those volumes? Or are we just uncertain on some of the contract outcomes and pricing?

Well, let me clarify. We’re well along the way. They’re not completely complete. And I think it’s inappropriate to say too much about pricing. What we wanted to convey there is that we’ve had a very positive negotiating cycle and one that we could build on for 2025. I feel like sometimes there is negativity around the increase this industry has achieved in terms of pricing. And is that all going to be given up. And my point on that is not so. We do see some mix change in terms of who our customers are. That’s part of our strategy. We think that makes us less vulnerable to, let’s say, a consumer sell down a little bit. And I think in terms of volumes when we say it’s a trough, just looking at how high imports are right now, the ongoing effort of the global companies to retain their market share, coupled with the current regime in the United States in putting these tariffs or these duties in response to anti-dumping charges and then the likelihood of that going forward. I mean, I think you put all those things together, and it just sets up a pretty positive outlook for next year.

Okay. I guess, just to follow-up another time on the contract side or at least on the gross profit per ton side of things, I guess I just want to understand is, is that a conservative base that we should be thinking about in that we’re not losing price volumes gain and there could be upside with favorable contract negotiations? Or is that already baked into that assumption, some changes there may be offset by mix? Just not sure how conservative or not that expectation is.

Yes. So I remember a couple of years ago, we indicated, wow, earth-shattering change in the pricing negotiations. I would put these as positive, continuing to move us forward. I would not be looking at a repeat of what we achieved a couple of years ago and recognize we’re in the supply-demand section segment that we are. Also that we’ve potentially adjusted sort of where we’re playing in terms of the customer mix in the industry space. But all in all, and it’s also like they’re not completely done, Josh. So it’s just – it’s awkward to talk too much about exactly where things are coming in. But we’re well on our way, we’re ahead of schedule. That was our strategy and our approach for this year. We think that’s worked well for us. And we’ll give our real guidance when we do our Q4 results.

Understood. And I guess just on Specialty. I mean, I think you’re framing of favorable markets for continued volume growth. Not many companies have been talking about coatings markets and plastics market assets favorable near-term. So how much of that is a comment of, I guess, you have Huaibei ramping and you had some cost issues this year versus you’re actually seeing growth in your end markets at this point in time?

Yes, we would see a couple of positives. Number one would be the debottlenecking demand in the specialties. I’d say, a long-term driver, you see this move to get rid of lead piping in the United States, which I think would be maintained in future administration. That’s a real infrastructure, piping for the water systems, that sort of thing. So I think you can point to some specific drivers there and just a general sense of what manufacturing momentum.

Okay, thanks. I’ll turn it over.

Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Good morning. Can you give your perspective on the outlook for capacity addition either new plants or debottlenecking like just the rate of capacity additions by region over, say, the next three, five years? To what extent is there evidence that we’re getting near or at the level of reinvestment economics at least in some regions?

Hey, Laurence, thanks for the question. I think that it’s not just economics, it’s also the risk, it’s the uncertainty in the markets and all of that. So I think the only thing we’re going to see in the United States or North America, I’d say, would be people like ourselves who invest in maintenance and reliability and we could gain, I don’t know, 0.5 point to 1 point a year of capacity just by better ability to run the plants consistently. And I’d say I see something similar in Europe. I mean, it’s just a lot of uncertainties with how the war is going to end. There are other exports into the marketplace and so forth. I don’t think – we saw the Indian market expand. They kind of have been saved by the war in the European theater, which now gives them an export market. I would think they would be cautious right now about their desire to expand. And then in China, okay, sometimes people look at that market differently. But I don’t think the current Chinese economy is really conducive to people expanding capacity there. So I really don’t think there’s a big incentive for – like a new brownfield line or a new greenfield line in the Rubber Carbon Black space. I think all the sustainability stuff is net question mark as well. As you well know, right, you’ve got this question with monolith and pyrolysis in the U.S. So all of those just add uncertainty, which I think discourage investment.

And then on the Specialty side, I mean, to the extent that you’re flagging already kind of the softish December. To what extent is that just typical winter – the last couple of years, you’ve seen the kind of end of year destock. Is it just that? Or are you seeing people say, well, you don’t renew trade dynamics, what policy will be, there’s going to be a bit of an information gap for six months, let’s pause on CapEx, pause on new product launches. I mean, to what extent are you seeing like a broader pause from customers’ uncertainty?

Yes. I would say we – customers have expressed to us even before the election that they just plan to take longer holiday outages in December. You shut down the whole factory, there’s certain economies that go with that. And that’s not just limited to Specialty, that’s Rubber as well. I saw that really as year-end thinking about what inventory levels they wanted more than a 2025 picture.

Okay, great, thanks.

Thank you, Laurence.

Thank you. Our next question comes from the line of John Roberts with Mizuho Securities. Please proceed with your question.

Thank you. In specialty Black, you mentioned regional mix effects. Could you elaborate on that? I think of the Rubber black being – business being regional, but specialties, I think, of being more global and more product mix effects?

John, that’s an excellent question. And you’re right, it is a more global market. But profitability in different markets can vary, right? So I would say, in general, let’s say, profitability in Europe is higher on a per ton basis than in Asia. So kind of what we’re signaling there, it was just more strength in Europe, North America in that time period versus Asia. And we don’t put that in the mix line the way we show it. We – that’s really more in the volumes, so we call it out.

And is Europe more profitable? I mean very few companies have more profitable European businesses than other regions. Is that the mix in Europe is more coatings and inks in less plastic masterbatch and so forth?

I would say, I think many chemical companies would tell you that, okay, you’ve got the whole volume effect. But for a like-for-like product profitability, it often is a little more challenged in Asia than it is, let’s say, in Europe or North America. And that’s really what we’re referring to.

Okay. And then secondly, Trump has said he’s going to end the Ukraine war in I think Putin, I guess, has already called him and said, he’s ready to talk that’s there. How do you see Russia normalizing or if we go beyond 2025?

Right. So let’s say there’s a peace tomorrow, which let’s all be clear, right, would be a good thing for humanity. I think that Russia, Belarus, Ukraine, they used to do well over a third of the carbon black into Europe. Some tire companies bought as much as 50% of their carbon black from the Russians. I don’t ever see that going back. I don’t think anybody is going to want 50% of their supply chain coming out of Russia going forward, no matter what the price is. Now Russia was largely replaced by imports primarily from India, but also some from China as well as all the rest of us ramping up a bit. What I think we’d see in a situation where Russia was, let’s say, politically rehabilitated and came back, and I think that would take a little time, is that would just simply adjust the base where the imports are coming from. And that’s how I would look at that going forward.

Okay. So you think operating rates in Europe would be relatively unaffected? Maybe just to summarize that.

Yes. I think that anybody who’s got a plant in Europe, I think, is still going to be in a very good position to keep them running. I think that’s the rule – the learning of the last four or five years. And I think that will remain true.

Okay, thank you.

And I think like another, you currently see Russian product going to China, China project in Europe, like you can also just see supply chains potentially straight down a little bit.

Thank you.

Thank you. Our next question comes from the line of Jeff Zekauskas with JPMorgan. Please proceed with your question.

Thanks very much. In a world of higher tariffs for China and other Asian countries in the event that occurs, is that good or bad for you?

So for Orion specifically, our view is higher tariffs would be good for us. We have mainly local production. Our customers are impacted by imports as we talked about, a situation where there’s more manufacturing locally for the local markets. In general, it’s going to be a big plus for us.

Okay. And you were talking about the Thai anti-dumping investigation. So I think that there have been final determinations. So do you see that as altering the truck market and truck tire market in particular ways?

Well, so Thailand is not the only company – country that exports to the United States. But I think incrementally or sequentially, each one of these is a step in that direction. Have we – could I tell you, we’ve seen that impact and we can point to it exactly in our volumes at this point. No, of course not, right? That’ll take a couple months to work through the system. But I would just say it’s one of the factors that should get us back to more traditional levels of imports Beyond that, right, there’s also the local manufacturers just adjusting where they’re positioning themselves within the top tier market in terms of a value proposition that’s going to be more appealing to customers. So a 40,000 mile tire instead of pushing 60,000 mile tires as an example. And I think there’s just a number of factors that’s going to get that to revert to the norm. And we see that as an upside for us. Although that’s not what our assumptions necessarily are going to be for next year. We’ll wait and see between now and then when we do our guidance.

So you’ve spoken about being encouraged in your pricing negotiations. So in the United States for the last two years, tire production has been down. Where’s the positive leverage that the carbon black companies in the U.S. have? That is, as demand continues to fall, why isn’t it in the natural course of events that prices fall? Why do they hold or go up? What keeps them up?

So the positive factors out there are, of course, you’ve been talking and we’ve seen the trend over the last couple of years, but we’re negotiating course for 2025, right? And there’s a difference right there. A positive factor for us is, if we think on a global basis, people who have been relying on imported carbon black in Europe haven’t always necessarily liked it, right? So that’s an advantage for us in the European market. In the South American market, it would be supply chain reliability, I’d say, is a big part of the driver in terms of what people are thinking of. And then finally, we changed our commercial strategy a little bit this year to reflect a little bit the shifts of different companies and also just trying to move this thing through more quickly. And I think that was also a positive for us. So that’s how I would frame it.

Okay. Great. Thank you very much.

Yes. Maybe if you’re going to say one more thing, Josh, you continue to look – Josh, sorry, Jeff, you continue to look forward to the future, I mean, we continue to have expansions in North America and Europe without really carbon black expansions. And so that doesn’t really answer the question for 2025. However, there is some ramp at some of the newer sites for next year. And I think that’s just like an overall reminder in the back of the mind of every negotiators. They’re thinking about how they position themselves, not just for one year, but longer-term, who they’re sort of paired up with. So I think that’s a little bit of a positive as well.

Thank you so much.

Thanks, Jeff.

Thank you. Our next question comes from the line of Jon Tanwanteng with CJS Securities. Please proceed with your question.

Hi, good morning, guys. Thank you for taking my questions. I was wondering what kind of volumes do you think would come back to you and the industry? With the tariffs coming in line, maybe there’s some more, maybe there aren’t. But from that factor alone, assuming, just demand was flat, is there an expectation of how much the importers might exit the market or how much you might be able to regain just in terms of share on volume?

Well, I mean, I think if we got tire imports just back to where they’ve traditionally been in the low 50s with the miles driven today, and if that was coupled with we saw manufacturing picking up, right, because it wouldn’t just be tariffs on tires, so you see truck traffic picking up, you’d be back to volumes like 2017, 2018, 2019. We would be heavily loaded and we’d be at significantly improved EBITDA from where we are. So I don’t think it requires a lot to really get there. And again, let me stress, I don’t think the story here is just one about tariffs. I think the tire manufacturers are moving and working in this direction as well. We all have the same desired outcome in that regard. But clearly I think you just need to get back to where you were in the late teens.

Okay, got it. And then, Jeff, just a quick question. What’s driving the increased working capital this year? My assumption with lower crude prices that might actually be a tailwind for you, I’m wondering what happened? Maybe I missed it earlier.

Sure. We built some inventory, particularly in the third quarter, as we mentioned on the call. And so that’s a big step. I think, as we go into Q4, as I noted, we expect to see – as we see some seasonal impacts, we perhaps will see inventory come down a little bit, but we’ll also see receivables come down and you’ll see working capital. While it will be up year-over-year, it will be down from where it is right now.

And on inventory, I’d just like to stress, because we got some questions last time. We’re not talking huge movements in inventory, but we’ve had certain grades at certain locations where we’re below our target inventory levels. And really we’ve just been looking to recover that. And then there’s some places, right, where we’ll have a step change come January and so getting ready for that as well.

Okay. Would you expect a reversal in entering 2025 or is that kind of mostly going to be a flattish?

I wouldn’t see a reversal. I mean, what you would expect in Q1 to have higher commercial activity, so let’s say just the customer portion of that would go up a little bit in Q1.

Yes, I think if you look across what we’re looking at 2025 is you will see quarterly swings, but across the year we don’t see a dramatic change in working capital for 2025. But you will see a step up in Q1 as we usually see in the first half of the year and then kind of works its way down through the second half of the year.

Got it. Thanks. And then Corning, sorry, just one more if I could sneak one in. To go back to the import question, do you see the industry building inventories, while before tariffs are put in place and then maybe some higher inventory entering the New Year or before that that needs to be burned off impacting you?

Right. So let’s first clarify what we mean by industry. There’s very, very, very little carbon black imported into the United States. So I don’t see any impact around that. We’re then talking about the tire market. You might recall last quarter one of the tire companies speculated that some of the step up in imports was just that people trying to move product before the tariffs hit. I think it’s quite likely you could see an intermittent kind of blip on imports if there’s a deadline of when they’re going to be inputted. I think that that could well happen. But nothing – all this is speculation based on the election. I want to be clear, like tariffs is true, it’s a net positive for us, it’s a net positive for this industry. They would be good, we can do good things without the tariffs and I just like to make that clear.

Got it. Thank you.

Thank you. Our next question is a follow-up question from the line of Josh Spector. Please proceed with your question.

Yes. Hi guys, just a quick one. I just wanted to ask specifically on Huaibei, just given some of the shutdown impacts and the requalification impacts in this year, how much of a drag has that been in 2024? And I guess should we be thinking about that as a benefit to 2025? I’m not thinking about the volume side of it, more just what’s in your control on costs.

Sure. I would say you would expect that to be, I don’t know, low single to mid digits impact for this year and I would expect minimum of like $10 million swing as we move to next year.

Can you explain that last point? So a $10 million swing even though a low single to mid-single digit impact, does that assume that you sell out some of those volumes or is that just…

Yes, I’m sorry. My positive swing would not just be cost related because we’d have the plant operating team cost that kind of thing. But a positive swing would be including the loading as we reload that plant next year.

Okay. Got it. Thank you.

Josh, this is Jeff. Just to clarify a little further, we have talked that we feel over time that there’s probably about a $20 million benefit to Huaibei from where we are in 2024 to where we think we can be going forward. We think – as Corning said, roughly half of that we think we see in 2025. And then I think the rest of it, you could assume would hit probably in 2026.

Yeah.

Okay. Thank you.

Thank you. There are no further questions at this time. I’d like to turn the floor back over to Mr. Painter for closing remarks.

Okay. Thank you again for joining us. As you can tell, we’re very confident about our direction and our ability to significantly step up our free cash flow. We appreciate your interest and look forward to more detailed discussions with analysts and investors following this call today early next week. On the calendar, we’ll be at the Baird Conference in Chicago next week and in NDR the following week in the Boston area. We look forward to seeing many of you. Have a nice day.

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