Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Specialty business volumes improved by 17% year-over-year, indicating strong performance in this segment.
- Pricing in the rubber segment is up year-on-year, with expectations for further gains in 2025.
- Orion SA (OEC, Financial) plans to resume share repurchase activity, reflecting confidence in the company's valuation.
- The company is making significant progress in sustainability, including producing carbon black from biocircular feedstocks and investing in tire recycling.
- Orion SA (OEC) expects a positive outcome from the annual tire maker supply contract negotiations, driven by industry restructuring and potential tariff increases.
Negative Points
- Q2 EBITDA was below expectations, leading to a revised 2024 guidance midpoint that is $25 million to $30 million lower than initially projected.
- Lower-than-expected rubber segment volumes and adverse cogeneration significantly impacted financial performance.
- The company faced higher maintenance costs and unplanned maintenance activities, which negatively affected EBITDA.
- Rubber carbon black demand is soft in key markets due to consumer trade-down to lower-value brands and increased imports.
- European power prices have been below expectations, further challenging the company's cogeneration contributions.
Q & A Highlights
Q: With things being softer, do you see volumes down in the fourth quarter for both specialty and rubber? And how should we think about that?
A: Looking forward, July was on track for us and showed a bit of recovery, especially in rubber. We expect some seasonality in Q4, but not as much as we've seen in the past due to the absence of a big EPA style high in that period.
Q: Given the inventory build and the absence of working capital, how do you opportunistically balance the buybacks? Would you increase leverage to do some of those opportunistically in the second half?
A: Yes, we would be willing to have a slight increase in leverage if needed. However, it would not have a meaningful impact both on an absolute and on a leverage ratio basis.
Q: What were the maintenance costs in the second quarter, and will that subside in the third and fourth quarters?
A: We had more planned maintenance in the first and second quarters, which was included in our guidance. We also had some unplanned maintenance in Q2. We expect less planned and unplanned maintenance going forward. The unplanned maintenance impact was around $2 million to $3 million in the quarter.
Q: Is there any end market in Specialty that is outperforming or underperforming?
A: The coatings area has been relatively strong, including automotive and general coatings. In polymers, some lower-value areas like masterbatch were strong for us. However, there is some movement quarter-to-quarter in buying activity.
Q: Do you publish or release your capacity utilization in rubber black, and what do you think it is for the industry?
A: We don't speak for the industry, but we were in the mid-70s, which is relatively low compared to mid-cycle. We expect mid-cycle to be in the high upper 80s range.
Q: Can you give more color on the economics of tire imports versus domestic production and how higher shipping costs might affect this?
A: Low-value import tires are currently coming through. With tariffs, we might see even cheaper, lower-value tires or a shift back to higher-value, lower-cost-of-ownership products as consumer sentiment changes.
Q: Are you expecting improvement in trucking and manufacturing through '24 and '25 despite macro uncertainties?
A: Yes, freight wage data suggests we have bottomed and are improving, though gradually. The data indicates a positive trend.
Q: Will you be switching rubber reactors to specialty as the trajectory improves?
A: We will put rubber and specialty business in competition for our reactor hours. If there is ongoing softness in rubber, we might reallocate capacity to specialty, tightening up the rubber market.
Q: How do you expect gross profit per ton for specialties to trend?
A: We expect gross profit per ton for specialties to turn up in Q3 and Q4. We anticipate it to be in the $650 to $700 range, though not at the 900 level seen previously due to significant positive impacts from cogeneration.
Q: Can you discuss conditions in China and your expectations in the guidance?
A: China is experiencing reduced economic confidence and investment hesitancy. For us, the focus is on resolving startup issues at our Huaibei plant. The overall China macro is challenging, with OEM build being an area of some strength.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
