Orion S.A. (OEC) Earnings Call Transcript & Summary

Thanks everyone for joining, again. Josh Spector, UBS North America Chemicals and Packaging Analyst. Happy to be joined by Orion Engineered Carbon of Corning Painter, Orion's CEO on the stage with me. And then we have, Jeff Glajch, the CFO and Chris Kapsch, IR, in the audience as well here in case, if needed. I think before we get started, just disclaimer, as a research analyst need to disclose the nature of myself and UBS without any firm, we express with you on the call today, those are available at www.ubs.com/disclosures or reach out to me and we can get those to you. So, I think the first place we'll start here. First, I'll say thanks, Corning, for joining and ask Corning to give a really quick overview of just Orion, who you are, business mix, kind of key drivers, set the charge.

So first of all, thanks, Josh, for the opportunity to be here for everyone who's listening in or here in the meeting room today. So Orion makes carbon black. It's an essential material. It goes largely into the rubber industry. So think about tires, think about belts, hose, that kind of thing and also into a variety of Specialty markets. We're over weighted in Specialty. Think here about kind of anything manmade that's black, whether that's a synthetic fiber, coating, ink, engineered plastics, look at your phone, look at your dashboard, we're kind of everywhere. The big themes for us is number one, cash flow. So cash flow has been tight in part because we only recently really moved up the pricing significantly in this space 2 years ago, and we had a lot of spending prior to that in EPA. And right now, we're closing out our really big growth investment in terms of La Porte, Texas, which will qualify us into the lithium ion battery and wire and cable market. So that would be one. As our capital spending comes down, we look out to 2026, probably $80 million to $90 million even if EBITDA just stays constant, we just keep up with cost inflation, it would still free up a significant amount of free cash flow for us in that time frame. Secondary thing and it really helped us to move the pricing is just restructuring this industry, which is to say people building tire factories in North America and in Europe and really no carbon black expansion to speak of, particularly in the U.S. And in Europe, the ban of imported carbon black from Russia and Belarus really tightens up those markets. So there's a quick summary for you, Josh.

Hit on a lot there. So we'll break that apart piece by piece here. So first, I kind of want to talk about the earnings power. So you guys had an Investor Day a couple of years ago, you talked about $500 million in EBITDA power, but obviously wasn't as explicit target by a date, but more of a mid cycle thinking. I guess today we're sitting at less than $350 million, I guess, if you can, one, talk about your level of confidence in that earnings power, has anything changed? And then two, talk about the path for you to get there?

Sure. Well, so you used the expression earnings power, we put it as earnings capacity. And we have a goal to have that capacity in place by 2025 and we'll do it. So, for that to happen, to make that forward statement, we, number one, would say, we've got about 140 kt of rubber carbon black out there, capacity available to us. So that's about $60 million to $70 million of EBITDA potential for Orion right there. In a mid cycle economy, we would expect to sell that all out because again, there's been expansions of the tire capacity in North America and Europe, not so in rubber carbon black. Next up, on Specialty, we'd say we have 20 kt to 30 kt, meaning kilotons of capacity available. It's more profitable. So that would be worth about $20 million to $30 million of us. We have a new facility in Huaibei, China, the Anhui province. So that would be worth about $20 million of EBITDA to get that loaded. We then say we have the potential, I'd say, pretty comfortably for another $15 million or $20 million of EBITDA just from price, efficiency, mix. Mix is a big thing for us, especially in Specialty, where different end markets were able to add more value, therefore, we're able to get a little bit more value for it. And then the final closure of that in terms of capacity would be bringing on the La Porte plant. That's due to come on in the second half of next year. To be clear, it's not going to be sold out and loaded by the end of next year. So in terms of earning capacity, we see that we're going to have that in place. However, especially for the more difficult qualifications, the higher margin applications there, that's going to take longer to get a qual. I'd say, generally speaking, the more differentiated the sale, the more profitable the business, the more challenging the qual is. And that will go into lithium ion batteries and other advanced battery technology as well as wire and cables. So think of like Grid 2.0 connecting up remote wind, offshore wind, those sort of applications. And that's our pathway. So as I said before, forward looking statement, we're highly confident we're going to get there and that's the road map to do it. And really, we just need to finish off our work in La Porte and we don't really have to spend additional capital beyond that in a big way to make that all happen.

So maybe to put the 140 kt of rubber in some scale, How does that compare to your current capacity? I guess, do you grow into that over many years? Is there share gain? How do you reach that full earnings capacity?

Sure. So we're operating right now in low to mid-70s in terms of capacity. So think about that. We're going to have our second highest EBITDA ever. We're going to be 3% -ish off last year's EBITDA with that kind of loading. So that's just like a massive upside for us. And like we'd be way above our original guidance for this year if we just had rubber carbon black coming in the way we expected it for this year. So what's impacted that? Well, actually tire sales are pretty good in North America, especially passenger car tire sales, but tire imports have been up, right? So that reflects people responding to inflation, trading down, right? If you bought a top tier tire, move down a grade, move down a grade, pretty soon, you're buying an imported tire. I think that's been a big part of what's impacted this year for us. If we look at the most recent import data, it does show it's slowing. If you look at the most recent data from the Federal Reserve in terms of U.S. tire manufacturing, right, which has lagged tire sales. Tire sales were back to like 2019 last quarter, tire manufacturing well below it. But nonetheless, we've seen that tick up a bit. So I think like there, we're really looking for that market to recover. When we talk to customers, which is for us like supply chain guys, manufacturing guys, they would say, look, we need to make the value proposition in our marketing department, right? A tire with a mileage guarantee is actually a lower cost of ownership tire than an inexpensive import with perhaps no guarantee. And the other thing they would say is, look, if we're like proud, we can make a 60,000 mile tire or whatever. But if the market no longer wants that and people are looking more at cost today versus savings tomorrow, maybe we need to make more 30,000 mile tires. And so I think a lot of that is with the tire industry to kind of have the value proposition and communicate it, as well as there's some speculations. So some tire manufacturers thought the step up in imports, right, which impacted all of us, ourselves as well, was a little bit driven of people getting ahead of, let's say, anticipated tariffs. I don't see the EU or the North American governments surrendering their automotive industry, so we may see more in that space as well. So to get us back to that 140 kt, I mean, 2018, 2019 kind of volumes will be absolutely fine for us. Current like passenger car tire sales isn't that far off of it. Miles driven is really quite attractive. We just need on the passenger side just sort of getting back to previous import levels, which are always there, right. We don't make enough tires in the United States. We don't make the smaller tires. So it's not like this needs to go to 0. It's just sort of getting back to norm. And then the other part of it is truck, bus and so forth. That's probably about 45% of the rubber carbon black goes to that market. And there, you're really looking at, like manufacturing activity drives trucking more than anything. And if you were going to look at freight waves data, you'd see that came down for everybody listening. I'm sorry that I'd be motioning with my hands. But you can imagine a curve that trended down and started trending up, but then it sort of stalled on the recovery. And I think when we see the trucking industry coming back reflecting, let's say, just general manufacturing activity, those are the things we do it. So when that's going to happen? Well, so as soon as possible would be my view. And that's not just waiting for something to happen in terms of the economy or in terms of tariffs or government responses. But I think also just like in the value proposition of the domestic manufacturers in North America, in Europe, I think that's a good opportunity for these guys to bring it back. So we see that as, yes, quite doable.

Yes, that's a helpful answer. I'd probably talk more about the segments in a little bit. I'd probably want to go back up a little bit and think about capital allocation of free cash flow because to your point, it's probably the most important piece. So I think what's going on right now. So from my view, there's already been an inflection in OECs CapEx spending gone from environmental to growth. And that environmental side has now come down. But when you go back a couple of years ago, you made a decision we're going to immediately invest that in the La Porte facility. I guess, when you look at that now, has anything changed? And also just thinking about the environment on EVs from that perspective or is the outlook there as you still expected that, basically meaning do we expect the same earnings profile to pick up from here or anything we should be discussing differently?

So in our Investor Day in 2022, we laid out we saw 2 growth opportunities for Orion, both related to sustainability. So, in the tire area, all about circular economy, making carbon black from tires, we've done that. We've participated in a Michelin led EU funded program. We now have our own EU funding to continue work in that direction, not a big capital requirement for us. The other commitment we made at that time was we were going to go for it with conductivity, specifically for batteries, wire and cables. So think lithium ion, but actually people want to work with sulfur, iron, different things like that. There's an application there for us. And so we've built the plant to do that. We had bought a plant in 2018 that made conductive carbon from acetylene. It was really aimed at lower end applications like batteries in a flashlight. We tripled the lab space in that facility. We really upgraded it. We got qualified both by wire and cable companies as well as by lithium ion battery manufacturers. We're working with the same raw material supplier. In Texas, we're building the new facility, largely the same production technology and so forth. So we still feel good about that. If we were in a super hot market, right, maybe we would get qualified more quickly because if they're like hand to mouth, although it's normally a 1.5 year qual process, I'll be very hurried. I think we're going to see like the normal qualification process play out in this. We never had one of these super high growth programs, kind of our middle range number of what our expected case was is, I think, pretty common what people would see today in terms of 2030 sort of gigawatt hours. And like the premium product and other people invested in this was CNTs. Our material is often -- both our material and CNTs would be used in a battery, a conductive particle like what we make. Our price point is a lot less than CNTs. I think the way this market is moving is just sort of pushing customer demand into our direction. We're also a very clean product. We're not quite as conductive in fairness as CNTs, but you put it all together, I think it's a good place for us. I think we'll get ourselves qualified. We've also success in wire and cable with it. So do I wish the market was super hot right now? Well, of course, and the qual would be easier. But I think we will get that loaded and we still expect to earn the margin. So we said we'd get about $40 million to $45 million of EBITDA out of that investment. That's still absolutely our target for it.

Should we think about that facility having a base load customer, any visibility around you could say, hey, the pricing is where we thought it would be, the demand is going to be where we thought it would be, any context there?

So, I worked with previously supplying into the semiconductor industry for years. For products like this, even though you've got one factory that supplies it, now you've got a new one, you're going to have to get qualified. I would also not say a baseline. So if we look at what we do in the French plant, we want to supply as many different players as we can. The more people we get to qualify this material, the better it's going to set us up for loading the new facility in La Porte. Good prospects for us, I would say, initially, they're mainly going to be in Asia. That's where we sell most of the carbon black or the settling black from France into. But we'd be looking for people who then want to build a facility in the United States or Europe. That's not too hard to figure out who they are from their public announcements. We get it qualified. Hey, we're now the local supplier. I think in the way many things are going in the world having local supply. There's only 3 companies who really may do much with acetylene in terms of making these conductive carbons. We will be the only people manufacturing in North America. We are the only people doing this in Europe. So I think as those facilities come, like that's a real plus with it. That said, in the current environment, right, there would probably be more of a market in Asia day 1, but I think it really sets us up for that transition.

Okay. And then I guess when you think...

I do your plan on base load. So I'm not really gaming for one base load, right? I think play in the field is an attractive approach.

Okay. So moving past the La Porte facility, I guess, what do you think about next from here? Because I think generally, I mean, the market was somewhat surprised initially about the growth spending. You talked a bit more about growth spending a couple of quarters ago. That's now kind of dialed back. And I think the challenge here is that 5x EBITDA, you're not being valued as a growth company. So how do you weigh showing better free cash flow, cash return versus some of these albeit very attractive growth investments? How do you marry those 2?

Yes. So I think pretty straightforward. Right now, we don't really have the need to invest a lot more in growth, right? We got 140 kt, we just talked about in rubber carbon black, 20 kt to 30 kt in Specialty. Yes, the high end of Specialty, where it's super differentiated product where I supply you, you spend like a couple of years qualifying it, put a little paint chips out in Florida to check up. All right, we have to expand that to keep up with your ramp. It's not huge money. It's a good business. We'll do that, but we just don't need to invest a lot. We might down the road do more on conductive carbons. Yes, a lot has happened in the world of batteries, so we can pace how quickly do we load and when do we think is the right time to move forward and with what in the battery space. So we would look at, if you think about next year, probably $30 million less in capital spend and the capital we would spend would be the maintenance, which we've stepped up and we think we'll get a return on the incremental investment we're making in maintenance. And then really completing the plant in La Porte next year, starting it up in the second half and then a little bit of additional growth CapEx, for example, those super differentiated grades in the specialty area that require some extra handholding. If we go forward from there though into the next year, like the combined reduction in capital would be maybe $80 million to $90 million. That is not huge in the scale of the world, I get it, but the scale of this company, like that kind of free cash flow improvement is big. And that's just saying everything else stays flat, right? We sell some of that additional capacity. We continue to move the price north. We continue to improve the mix in our business. Like that's all have to be after tax, not just EBITDA. But in terms of cash for us, yes, that's all a step forward for us moving forward. So I mean, we see it from my perspective and ultimately, there's a Board involved in how we would allocate some of this. But my personal view, we don't really need to do a lot more in growth in that space. I've just -- I've got we've got what we need. Number two, I think if the current share price purchasing is a lot better way to reward shareholders than doing a increasing the dividend or something like that at the current prices. And I've never been a big believer in acquisitions. The only acquisition we ever did in my time here is we bought that plant basically for the cost of the plant that used to destroy acetylene for LyondellBasell, who is our supplier in France and who will be our supplier in La Porte, Texas. And so there, we are kind of buying the technology in the plant and the know-how, which, of course, then we upgraded, as I said, to get ourselves into the top end batteries. So I mean, that really leaves space in that area. And we talk about this internally. I think you should make your employees, every one of them as financially literate as possible. And we talk about, hey, we could do buybacks, we could reduce debt, we could invest for growth. So debt, really the best way to move that ratio down is to grow EBITDA, right? And we think we've got a pathway to do it. Okay, let's talk about growth. So for $18 million you can buy 1 million shares of Orion. You're going to reduce -- you're going to boost EPS with like no risk by like 1.7%. Like, wow, what's the growth investment any company has for $18 million smoother EPS like that. There it is. So we just need to be honest, like as employees, everybody is interested in growth, but hey, we can use some of that project execution skill into our maintenance area instead. We can do that productively. We can gain capacity as we step-up the maintenance levels. But for right now, at the current share price, I'd say that's a very attractive position for us.

So when do you get comfortable thinking about buybacks more so? What leverage level, I guess, obviously, cash flow is going to be a factor there, but how do you manage that over the next 18 months when CapEx is still a little bit more elevated?

So we announced in the last quarter that we're in a share purchase environment right now for Orion. In a way, we're sort of looking to the future because we're going to have very tight cash flow this year. Nonetheless, we think it's the right thing for us to do to kind of look forward 1 year. We're going to be measured in this, right? We're not going to like put our balance sheet at risk or the company at risk. So we've got the chance to potentially step up modestly from where we are now next year and do more as we get into 2026. So we've always taken a balanced approach to this, and I think people should expect us to continue to do that.

Okay. I think one thing to wrap-up cash, I mean, I do need to ask about the controls issue that you had earlier. I don't know if there's any update you can give about there's any potential of recovery on that and just your view about how tightly closed that issue is now?

So I would say that issue is extremely tightly closed, well understood. I'd also say you can do all the training in the world. You can train on this specific thing. You can make people take training every single month. You can fish every employee every single month, but holy shit, like somebody can still do this. And that's what's happened to us. It's a big drag and we talk a lot about cash as a company and cash application, how we're going to invest it. We use our cash flow, as I was just saying. I think it's just a huge blow to all of us here. There's a lot better things we could have done with $60 million. But I think investors should anticipate and should expect that before tax, we're going to have a $60 million loss on this. We're working on a recovery and there is some insurance and all that, but I think we should all just expect it to be about a $60 million increase basically in our debt level before tax. I do think it will be tax deductible. We'll have to go through the auditors and all of that, but I believe that will play out in that way. And so at this point, we continue the investigation, criminal investigation across multiple continents, internal investigations. The ultimate controls that we'll be changing as a result of this, you can imagine the audit committee and the full board are very involved in this. We've got outside consultants in it as well. We really need to let that process run before we can say more about what are we changing specifically around that. We obviously have clamped down very tight on those controls. I think we'll move to a slightly more balanced position as we get that advice.

Okay. I appreciate the transparency there. So shifting gears and kind of thinking more about the segments and I guess still slightly more at a high level. I think when some investors look at your stock and look at the earnings profile, you'd say, well, earnings moved up. Every or many other companies saw earnings step back down because there's a period of over earning. I have my view. I'd be curious on your view about why you'd say, why this level of earnings or higher level of earnings, particularly in rubber black is sustainable for OEC? What do you do to get here at the industry? What's kind of the next leg from here?

Yes. So I don't think anybody who looks at this should think we're over earning at all, right? We are entitled to get a return on capital. Everybody is entitled to a return on their capital. When I came into this industry, when I listened to competitor calls and our own calls before I joined, I heard a lot about margin. I didn't hear much about capital. That was one of the first things I changed when I came in. I remember this one guy who's a very aggressive guy, still works with us in the sales team of the tire industry. He's like, well, we won the last couple of years. Maybe it's their turn to win this year. I was like, no, you're wrong. We didn't win. We're below our cost of capital. You've lost. We're continuing to don't take it personally, but like this is crazy. Like this is not the way to run an industry for the long haul. And we all have to invest in the air emission controls in North America. We, by the way, are done with all floor plans. Not everybody is with their smaller number of plants. We don't have any plants in Canada, but Canada has woken up to this. And so 2 of our competitors have to upgrade plans now in Canada. People have to invest that. We've talked about the step up we're doing in maintenance. Hey, your return -- you can get a return on your capital you put into maintenance. That's fair. So I think like the big thing here is that. The second thing is, hey, supply and demand. So people are on shoring capacity. One of our customers in Asia, they had a factory burn recently. Very unfortunate for us, we're a supplier to them. Their stated thing is we are not rebuilding in this country. We're rebuilding or we're expanding further in Clarksville. They already -- I shouldn't say, they're rebuilding in the U.S. And they're expanding their position in Europe. They had a position in each place already. So I mean, you see that. You can look at all kinds of announcements of people onshoring capacity into those 2 areas. People who had maybe a big facility in Russia that they've walked away from, they want to rebuild now into Europe. So that's I think a really positive thing, just long term sentiment for it. We also have in Europe, well, they used to get their carbon black over a third of the carbon black from Russia, Belarus and Ukraine. So Russia and Belarus are now banned by the EU. Ukraine is a sad story. That needs to get replaced. There is not enough between us and our competitors like to make up a third of that market. So now those imports have to come in from India or from China. But think about it, right? So shipping costs are higher. We had, I think Hapag-Lloyd just a couple of days talking about if you think this can be smooth and we can adjust to the bull up effect in the supply chain, you're wrong, right? This is going to be volatile. Costs are up quite a bit now. Even if they come back down in the negotiating period, I don't care, right? We all know it's going to be volatile. And if you want to think about China, so China has a different raw material going into carbon black. It's coal based, meaning not coal fired power plants, coal gasification, but like coke oven gas, so related to steel. So I think there's a Chairman of Baowu, recently talked about, hey, all the challenges for the Chinese steel market. We can see all these challenges they have about people complaining about imports and all that. To the extent China Steel slows down, I think about real estate in China right now, to the extent that step down is going to make this byproduct raw material more expensive. And that's going to do 2 things. Number one, it's going to make China carbon black simply less competitive. And number two, if you're a tire buyer or a tire manufacturer, if you lock into that supply chain, then your input cost is just detached from everybody else because everybody else is more related to petroleum. So if things move a kilter, right, you're exposed to risk there. So I think that's another factor, right, that affects like a premium we're entitled to being native in Europe. And that's a premium against the other guys' price and the other guy's price is going to have to move with higher shipping costs, right? That's what the delivery cost is going to So I think you put those things together, you look at right now maybe decreasing imports, a little bit of improvement in manufacturing, that's another thing that would tighten up the markets. Another element is, yes, it's a little softer, not super high loaded right now. At our current loading, right, low to mid-70s, we're going to have our second best year ever of EBITDA. We're going to be only like 3% off. So I'm not desperate in this market. And it's clearly an area where we can move up from if we think about it that way. So I think that's this year. We're not negotiating for next this year. We're negotiating for 2025. I think there's some positive trends there. If manufacturing picks up, that will pick up more truck tires. So I think all those things are there. I guess some of the answers I gave you are specific to '25. Maybe another way to answer it is just numerical. We've raised price, I think, every year since at least 2018. GP per ton has gone up every year since 2018 except for 2020, right, fixed cost absorption, but every year it's moved up. The big step up was not last year, it was 2 years ago and we took another step up this year. Like this is just a supply and demand restructuring as well as like if you're going to invest, you got to get a return on capital and we're entitled to that price and that sure as hell isn't over earning, right? That's what you need to be like in this business long haul. I'm sorry. I'm passionate on the topic.

No problem, I think. So I mean just to frame it then, so I mean returns seem like for the industry, they're at a healthy level, but we're not at the point where it's going to attract. I guess the risk is that it gets too healthy and it attracts more capital. I guess there's 2 things to ask on there. One, I mean the industry is semi consolidated when you think about Europe and North America. So some of that's maybe more visible and more disciplined, but how do you avoid basically attracting new capital to here? And even if you did have the money, could you actually build more of these plants in other regions?

So I mean, you need the raw material, which would be one thing with the changing in the more economies and less coal, like that's one thing. Number two, I mean nobody has announced in North America. In Europe, the only things are we brought on a plant in Ravenna, another reactor line for like 20 kt to 30 kt. That came on stream. It was really aimed at Specialty, but it came on just after the invasion. So we flipped it all to rubber that loaded in 1 month and 1 competitor has announced 40 kt. And that's against again just Russia alone about 600 kt that went into Europe and that's it. And nobody has announced rubber carbon black capacity in North America. And just the cost to do it, I'd say, is very high. In North America, you have monoliths, the group trying to do methane pyrolysis, a way to make hydrogen. You'd also get carbon black. We could talk more about that if you want. It's been delayed multiple years. But nonetheless, there it is, an overhang. So like what [indiscernible] wants to build with that hanging around? And in Europe, you have open questions about what if there's peace, this and that. The worst happens, it reverse to the old business model. But I think that's just a discouragement for investment there. And I think tire guys would really have to change the business model, long term commitments, to get people really motivated in this marketplace. So for right now, I see little risk of that. And a Greenfield site permitting, it'd be probably 2 to 3 years anyway.

Fair enough. And I guess just on the Russia point, so I mean with the bans, I mean, corollary situation in fertilizers where there were bans and then it quickly came back. This is different in terms of what's banned and how structural it potentially is. But I mean, what's your view about the industry being able to rebalance to this in a year or so and then things normalize versus structurally change the cost structure?

Yes. So I would point out, when we made a significant step change in the profitability, we achieved more in North America than in Europe, more in North America than in Europe. So this whole thing of Russia has nothing to do with what happened in North America or in South America. And yes, it does include a little bit what happened in Europe, but that was going to tighten one way or the other regardless. So I think it's different from those other ones. You've seen the staying power of it thus far. And I'm not sure if I'm answering your question directly on it, Josh, but I think it's unlikely to be able to reverse. You've just got, amongst other things, maybe there wasn't an expansion in cropland, but there's definitely an expansion in tire manufacturing. And so like that product, you can't make it without carbon black. It's got to come from somewhere. And yes, so right now in the current environment, it comes from India and China. And so we price against that in terms of their input costs and their transportation costs. But nonetheless, right, it's just a growing demand in the region.

Yes. No, I think that makes sense. I think the shipping piece is also just another factor on what that does to reprice?

It's 2 things. I mean, one thing is the cost and the cost variability. The next thing is like there's a lot of blank shippings in this world. Blank shipping is when the boat was booked and then the boat isn't going to sail. So you got to find your way on another boat. When you talk to people who work in that supply chain, like it's miserable. It's really hard. And you shut down a factory or a factory line as a procurement person, you are not popular, right? That's like the biggest and a lot of fixed costs in these big factories. So I think it's both the cost, it's the unpredictability of it and it's frankly just the reliability and the headache versus you're buying from someone who's on the ground where you are. It's a there's a value there we deliver and it's only fair we are able to capture some of that value that we deliver by being in the region and having continued to invest in maintenance and everything else in these regions, air emission controls combined.

Okay. And I mean, we talked about it earlier around the imports in the U.S. Environment, but I want to kind of hit it one more time, slightly more detail just from the perspective of are we actually, so we've seen imports start to come down, but structurally, are you seeing enough either innovation of the tire companies to maybe change their mix or controls around imports to get the domestic tire production up? Is that a declining risk, same level, anything moving there?

So, I think that they have seen this before and have had to change their value proposition slightly in terms of what mix of tires they're making and to run the advertising and communicate to the marketplace the value of their products. Again, when we talk to tire manufacturers, they mainly why they may be frustrated with their marketing department, the guys we talk to, I think they're confident, hey, this is something we can do. But regardless of that, say, soft comment, if you just look at the most recent Fed data, right, probably the most rapid data you can get is Federal Reserve on tire production in North or in the U.S. And it's up like 2.5%, I'd say from last year. Okay, it's down from '22, it's down from '21. So there's room where they can go with that, but that's a positive. And that's also absorbing the fact that truck traffic isn't what it once was, right? And that's going to come back as it naturally no one is going to incent that, that's going to come back as it comes back to the general economy. So I mean, like I think tariffs and all that, that's an upside. I don't think a business strategy should be based on government action or hope government action. So like those things they can do to make that happen and I think they are on that case. Okay. And I think empirically you do see the volume is up. So that's a step in the right direction.

Okay. And I think the last thing on the rubber side is just the contract negotiations. I don't know if there's any latest update you can give there. You talked about the approach being different, maybe starting a little bit earlier. So where are we now?

Yes. So we shared in the first -- so first of all, there's a limit to what I could say because we're in the middle of it. It's all sort of commercially sensitive. We did share our first earnings release that, wow, some people were out already. We indicated that, that was great, but we weren't in a hurry to close. We shared that we had sort of been left by the altar of last year by someone who drag out these negotiations and in the end didn't want as much as they had sort of hinted they were going to want or indicated they wanted and we were going to take a different approach. We're not like having a really prolonged negotiation. In the second quarter release, we said, yes, that didn't actually come to a head. Just like we promised, we had a negotiation, we had a time limit on it. We didn't get it done. We closed that. We, of course, are open to reengaging with those people as we move forward in it. That's more our approach this time. We think that's going to work out well for us. We think it will be another successful year. I don't want to talk about specifics. I don't think this may be appropriate. But I will just say it one more time, right? So you got the long term restructuring of this industry. So, a little soft in '24, who cares, right? We're negotiating for 2025. You got all the trade friction out there. You got the difficulties in shipping. You've got the potential for a rebound in rubber from the trucking volumes recovering for us. You've got the full ban of Russia. So there's probably still maybe 200 kt -- a little more than 200 kt of Russian carbon black coming into Europe this year. That's maybe not going to go with 0. Is there going to be any cheating? But I bet it's going to be less than 50. You got Belarus taken out now. Those are all positives for us. You have this question over China Steel. Like that's all public data. That's all out there you can look at. I think those things are by and large really positive trends for us.

All right. That makes sense. I think we talked initially overweight specialty. That's very little about that. So it's in the last few minutes just talking about that side of the business. I think the debate has been a lot less around the earnings power and everything going on there. But what do you need really to get the volumes in that business going again?

Sure. So the volumes have improved for us, right? We are going to do better than we expected this year in Specialty. What we need is just a broader base manufacturing rebound. When volumes are low in Specialty, I think it's a huge mistake, especially in the premium grades to chase volume with price. You're just destroying value, and their volume isn't there to be had. And a lot of times in the premiums, you may be sole source. They spend all these years qualifying you. That's really not the issue. The issue is just what's there and demand. So for the most part in that area, we mean that. We have some areas where we've got some raw material costs that have pressured us in this whole time phrase. So improving on some of the raw material costs as we work through this is another opportunity for us. So we've got a variety of levers there. But I think this year is going to be a rebound over last year. This year is going to be better than we initially thought. And we just sort of need to keep that going. Specifically to the volume, that goes a lot towards the demand. Keep in mind also, we have shifted some volume, like I mentioned, RavennaLine 4 from Specialty into rubber. And we will always put, let's say, the -- that one zone of specialty and rubber like compete for reactor time. And that's just part of how we create some pricing pressure in our marketplace.

How about the mix element of it? I know it always moves around, but I mean coatings and maybe some battery materials are higher mix. Where is that today? And is that a lever that also can be a step up factor?

So it's a so for anyone who follows us, our GP per ton versus like margin of sales because we pass through energy costs to our customers effectively. So energy prices go up, it looks like margins went down, but it's not really true. Second thing I'd say, if you look at Specialty, it's always going to be chunky or bouncy because we price to the value we create. We do some very special things for some of the high end specialty grades. So when those go, we've created more value. We make more profit than some of the more less differentiated grades. So coatings in general, we shared last quarter, it was actually pretty good for us in terms of volumes. But automotive, especially automotive top coat wasn't as strong, right? So it was more happy homeowner, go to a Home Depot, that kind of thing, go to our marine protective coatings, these sort of things were strong. They're still better than our average, but they're not as great as, let's say, some of the more premium areas in that space. In this area, really, it's a long term thing we do to drive it. So we opened up a lab in North America several years ago, working with customers on the qualifications. This can take years for those grades to get it in and then continuing the de-bottlenecking. So like that's where we spend that extra $20 million to $30 million. Some customers spent all these years, they put the paint chips out in Florida for years to see if they're going to fade. They're ready to rock and roll and a competitor started ramping before them and you don't have capacity after they did all that work, that's not very good, right? That's not the supplier we're going to be. So we continue to work and just debottlenecking, making sure we can support our customers' growth. They can put us into a new formulation with confidence, right? And we're going to have the product there for them. I'd say that's the other thing that's important for like driving the mix. When we bring on the new acetylene plant, right, that will be very additive to our mix. Yes, it's going to take some while to qualify it, but wire and cable, lithium ion batteries, other advanced batteries, we add a lot of value there. So again, we are able to get our share of that value.

That sounds good. And I think with that, we're up on time. So I want to thank Corning, Jeff, Chris, everyone at OEC for joining us today and everyone that's joined us in the room and online.

All right. Thank you all very much. Thanks, Josh.

Thank you.