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

[Audio Gap] It is now my pleasure to introduce Mr. Chris Kapsch, Vice President of Investor Relations. Please go ahead.

Thank you, Stacy. Good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion, and welcome to our second quarter 2026 earnings conference call. Joining the call are Corning Painter, Orion's Chief Executive Officer; and Jon Puckett, our Chief Financial Officer. We issued our second quarter results after the markets closed yesterday, and we have posted a slide presentation to the Investor Relations section of our website. We will be referencing this deck during the call. Before we begin, we are 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 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, August 6, 2026. Orion is not obligated to update any forward-looking statements based on new circumstances or revised expectations. All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the 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 alternatives to financial measures required by GAAP. With that, I will turn the call over to Corning.

Good morning, and thank you all for joining us. On the call today, I'll start with a few highlights regarding our strong second quarter results. The Orion team executed extremely well in an extraordinary time, and we remain keenly focused on the things that we control. Then I'll discuss bigger picture trends in our business that supported our quarterly results as well as some trade flow and regulatory considerations that we view as favorable looking forward. After that, I'll turn the call over to John Puckett for a more detailed review of our results before sharing some brief concluding remarks and shifting to Q&A. On Slide 3, Orion's adjusted EBITDA improved 26% sequentially to $58 million in the second quarter. We're particularly pleased with the results in our Specialty segment, where responsiveness to demand strength, coupled with prompt pricing actions contributed to what is our best quarterly segment performance since early 2020. 2 metrics exemplify this business' attractiveness as well as its much greater potential. Robust volume gains were geographically broad-based and across end markets. Timely targeted pricing actions also helped preserve the segment's profit, mitigating extreme feedstock cost volatility. Specialty's excellent results, coupled with our Rubber segment's steady performance enable us to reaffirm our full year adjusted EBITDA guidance range despite today's macro uncertainty and limited order visibility into the second half. We are lifting our free cash flow expectations for the full year, primarily thanks to tangible progress in working capital initiatives. We now expect to generate slightly positive free cash flow in 2026 at the midpoint of our guidance range despite still operating in trough conditions. On Slide 4, we highlight our stepped-up execution and intense focus on the factors we can control. As ingrained in Orion's culture, we always emphasize safety first, and our year-to-date safety performance has been exceptional with only one injury across all our people, sites and contractors, substantially better than chemical industry norms. I would like to thank the whole Orion team, but particularly those who work at our production sites for your commitment to safety. These results reflect a high degree of operating discipline. Let's keep it up. We are also encouraged by our continued progress on plant reliability. Supported by operational excellence programs, combined with prioritizing our maintenance CapEx on the most impactful projects, we are tracking towards our third consecutive year of improved plant reliability. In recent years, we have also worked to diversify our raw material supply options and production recipes, and this is flexibility. Our working capital initiatives are yielding measurable benefits. Structurally lower inventories enabled partly by progress in reliability and better forecast accuracy, along with improved payment terms have been the most impactful levers. Meanwhile, cost initiatives, including headcount, procurement and efficiency programs are delivering, and we remain on track for an annualized gross benefit of $20 million. On Slide 5, we discuss recent trends. Overall, our business continues to exhibit resilience despite oil price volatility and considerable global uncertainty. Underpinning demand strength during Q2 was customer preference for more derisked local supply chains. This favors our business model and footprint. A bit more color on the Specialty segment's performance here. In our Western regions, the recent top line strength reflects broad end market participation beyond restocking activity. Demand for products serving coatings as well as wire and cable markets such as infrastructure were particularly healthy. Moreover, our customers continue to express how their demand for our products reflects genuine orders from their customers. Pricing actions, meanwhile, have been effective in helping to protect profit. For our rubber business, tire-related demand in key geographic regions has been generally stable, but local tire production rates remain below historical norms. Despite that, the North American spot market was strong in the quarter and exceeded our capacity to accept incremental orders in some instances. We believe our rubber segment is set up for recovery based on several underlying trends like trade issues, the value of local-for-local business and some apparent tightness in local supply and demand. As import levels and channel inventories continue to normalize, locally made tire sell-in should improve, foreshadowing higher local tire production rates, a positive for Orion. On Slide 6, we highlight several favorable trade flow and regulatory considerations, which we expect will also contribute to improving fundamentals. Early last month, the European Commission finalized antidumping duties on tire exports from China ranging from 24% to 45% on all but one exporter. And the EU's parallel anti-subsidation investigation into Chinese passenger car tires remains ongoing. Moreover, there is a precedent for the European Commission to impose anti-circumvention measures should evidence emerge that there are efforts to bypass import duties. Given the Chinese imports into the EU dropped 75% from peak earlier this year when the antidumping duties were originally expected, this final action should reduce Chinese imports and support local tire production. Meanwhile, U.S. tire imports have been down versus prior year levels in each of the past 4 months. We continue to witness reshoring commitments, including at least 3 additional global players announcing their attend for a significant capital investment in North America tire production facilities. We believe recently announced closures of old higher cost plans need to be considered against the context of tire manufacturers, modernizing, expanding and scaling their best production facilities. On balance, this is healthy for the industry. Meanwhile, we expect a variety of secular tire and technology trends will contribute to steady and improving carbon black -- these include the preference for larger tires, greater wear associated with EV adoption to shift all-season tires and increasing standards around abrasion and durability in Europe. The confluence of these trends should translate into either higher carbon black content per unit or more frequent repricing cycles or both adoption and the shift to all-season tires and increasing standards around abrasion and durability in Europe. The confluence of these trends should translate into either higher carbon black content per unit or more frequent tire replacement or both, supporting our industry's fundamentals. All considered, there are multiple of reasons to believe our Rubber segment's footprint will remain essential, particularly given the absence of new Western carbon black production facilities. These dynamics underscore the durable nature of our business and our local-for-local value proposition. Jon, over to you.

Thank you, Corning. Slide 7 covers our second quarter results at a high level. Adjusted EBITDA was $58 million, down 15% versus the prior year, primarily due to lower Rubber segment annual pricing agreements. Despite 5% higher year-over-year specialty volumes. Adjusted EBITDA improved to 26% sequentially, with pricing actions in response to oil price volatility and improved product mix contributing favorably. Specialty was the star performer in our second quarter with adjusted EBITDA of $39 million, increasing 96% compared to the prior year period. The 5% year-over-year volume increase in specialty included nearly 10% growth in EMEA and the Americas. Increased earnings were also driven by pricing actions and favorable mix. Rubber segment adjusted EBITDA of $19 million was 61% lower year-over-year but was consistent on a sequential basis. As mentioned, the 2026 contractual price agreements were the main driver of the year-over-year decline. Also contributing were customer mix and the absorption impact as we reduced inventory levels and improved cash flow. We're really proud of generating positive free cash flow during the quarter, especially given the surge in oil-derived feedstock costs. Our working capital initiatives, particularly in inventory and accounts payable contributed to our success and generated $4 million of cash in the second quarter. CapEx declined $11 million from the first quarter, also contributing to the $2 million of free cash flow. On Slide 8, we get more granular on specialty quarterly adjusted EBITDA, which was the highest in 4 years. The near doubling of adjusted EBITDA was driven by 5% higher volumes, nimble and proactive pricing actions and favorable product mix. Demand strength in specialty was broad-based and across almost every key end market we serve. Sales into the general polymer end market were healthy. For example, engineered plastics growth was mid-single digit. Outside the general polymer space, we achieved double-digit gains with our higher-value solutions into coatings, wire and cable, packaging and battery markets. Our success in coatings was particularly notable given the recent softness in global OEM build rates. Above-market growth reflects demand for our best-in-class products supported by our recent expansion projects. Beyond automotive OE, sales of our coating solutions into marine, protective and industrial markets all performed well. Double-digit growth in wire and cable reflects the success of our newer conductive grades, supporting underlying energy and infrastructure market expansion. Slide 9 summarizes our Q2 Rubber segment results. Adjusted EBITDA declined sharply year-over-year as expected, but was consistent on a sequential basis. Lower 2026 contractual pricing, unfavorable customer mix and an absorption impact associated with internal inventory actions that were intentional were the primary contributors to the lower year-on-year performance. Higher production rates remain below historical norms in our key regions. However, tire sell-through rates are above build rates, and imported tires are trending lower. So we expect channel inventories will decline and support local tire manufacturing. One interesting note for the quarter, despite the overall year-on-year volume decline, there were signs of tightness in the North American carbon black market as we saw strong spot demand during the quarter in rubber. Spot market strength was such that we could not satisfy all the requests from our customers. And to be clear, consistent with our closing of several reactor lines last year, it is not our intent to hold capacity to back up competitors, domestic or otherwise. Let's move to Slide 10. Thanks largely to tangible progress from ongoing initiatives, working capital was a $4 million source of cash in the second quarter despite oil being up about 29% on average from Q1 to Q2. Let me put this into perspective. Based on our sensitivities, unmitigated, this increase in average oil-based feedstocks would have been a headwind of about $60 million in the second quarter. However, our actions around reducing inventory levels and increasing vendor payment terms more than offset this working capital headwind. This is a meaningful accomplishment that the whole team at Orion contributed to. Corning and I congratulate them on the outcome of their efforts. We will continue to take actions like these to drive free cash flow. Cash flow from operations was $27 million, and CapEx declined $11 million sequentially to $25 million, resulting in free cash flow of $2 million in Q2. Net debt at quarter end was $961 million, down modestly from Q1 levels with a net debt to adjusted EBITDA ratio of 4.4x, comfortably below our credit agreement leverage ratios. And finally, we ended the quarter with liquidity of $178 million. With that, I'll hand the call back to Corning.

Thanks, Jon. Slide 11 provides a revised outlook and sensitivity. Despite continuing global turmoil, we're reaffirming our full year adjusted EBITDA guidance of $170 million to $210 million which we raised last quarter. This guidance reflects our typical seasonality. Beyond that, we're lifting our free cash flow outlook range, which is now $5 million of free cash flow at the midpoint. This assumes crude oil prices averaging $80 per barrel in the second half of 2026, in line with recent industry forecasts. The $43 million full year improvement in free cash flow is a function of the progress we have made with working capital levers, which helped diminish the headwind associated with higher oil-driven feedstock costs. Our rule of thumb sensitivities are on the right side of the slide and have been performing as expected even in these testing times. Let me conclude with a few thoughts on Slide 12. The operating backdrop remains volatile, but it also creates opportunity for Orion to be entrepreneurial, to find and close on new opportunities and to demonstrate the resilience and durable nature of our business. Local for local is a smart, low-risk sourcing strategy and our commercial strategy is to build enduring partnerships with growth-minded customers that value our footprint, proximity, reliability and dependability. At the same time, our organizational mindset is laser-focused on performance metrics that drive value, including continuous improvement in reliability and especially in earnings and free cash flow. We believe the actions we are taking today position Orion regardless of how the macro and geopolitical backdrops evolve. With that, Stacy, let's open up the call for Q&A.

[Operator Instructions] Your first question comes from Josh Spector with UBS.

It's Chris Perrella on for Josh. Can you just -- where are you guys in the contract negotiation process? And what are the puts and takes there driving that? And then I have a follow-up on specialty.

Sure. So the negotiations have started off with some customers, I'd say, typical pattern in terms of sequencing of who's in, who's not. There's a limit to what I can say because it's competitively set up, competitively sensitive of what goes on. But I'd say the setup this year is a little bit better in terms of the imports, the regulatory actions, the tightness we saw in spot that kind of thing. And I'd say the other thing is customers have experienced this year the value of reliability.

I appreciate that. And on specialty, with demand, is there a headwind in the third quarter from higher raw material costs? What -- could you discuss more sort of the outlook for specialty in the third quarter, please?

Sure. I mean, seasonally, we typically see specialty a little bit weaker in the third quarter. Europe is an important business for us. So we have some seasonal impacts there with the holiday season in that time frame. We don't have huge visibility, Chris, to like customer forecast very far out, you get them, but there isn't a lot of confidence in them, I'd say. But yes, I don't think there's anything like super changing in the outlook from our customers at this point.

Next question or -- with Mizuho.

So it was a nice uplift in gross profit per ton in specialties. How much of that improvement will you be able to hold into Q3? Like is the mix improvement going to continue in Q3 as well? .

Sure. So the biggest factors for us there were really volume and mix. So on those areas, like it really depends then, okay, exactly there's always some ups and downs in 1 quarter to another. And again, there isn't a lot of visibility around that. There's probably some gain we got on timing and pricing and so forth, which I wouldn't expect to continue. But we don't really have -- in the third quarter, let me say September is almost always like the biggest month, and it's just hard to speak with great certainty on how that's going to play out right now. But you have our guidance.

Got it. And then are you going to continue the favorable payment terms into the next 2 quarters as well? .