Orion S.A. - Q2 2023

Transcript

Operator (participant)

Welcome to the Orion S.A. second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce our host, Wendy Wilson, Head of Investor Relations. Thank you, ma'am. You may begin.

Wendy Wilson (Head of Investor Relations)

Thank you, Kyle. Good morning, everyone, and welcome to Orion's conference call to discuss our second quarter 2023 financial results. I'm Wendy Wilson, Head of Investor Relations. With me today are Corning Painter, Chief Executive Officer, and Jeff Glajch, 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 our call. In addition, all forward-looking statements are made as of today, August 10th.

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 this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release. I will now turn the call over to Corning Painter.

Corning Painter (CEO)

Thank you, Wendy. Good morning, everyone, welcome to our earnings conference call. As you can see on slide three, we had another excellent quarter, second only to the first quarter, naturally making for record first-half performance. Our results reflect the hard work of the Orion team to fundamentally transform the company, providing the industry-leading products customers demand and returns on investment that investors deserve. We've been aided in this by a restructuring in the broader marketplace that has been building for years in our key markets, has now passed the tipping point and still continues to build. We continue to be one of the few specialty chemical companies on track for a stronger 2023 compared to 2022, and we expect record profitability this year.

We delivered second quarter adjusted EBITDA of approximately $87 million, a 5% increase year-on-year, and adjusted diluted earnings per share of $0.53. This resulted in record adjusted EBITDA of approximately $188 million for the first half, a 13% increase year-on-year, and record adjusted diluted earnings per share of $1.27. We also delivered strong second quarter operating cash flow, reduced our debt level while also completing our $50 million share buyback and starting on the new buyback. We expect to generate more than $200 million of discretionary cash flow this year, reflecting a conversion rate of over 60%. This is a huge step up for us, which we expect to maintain. Jeff will discuss this further. As you have seen, we recently published our 2022 sustainability report.

I highly recommend that you take the time to read it, as sustainability is central to our strategy. In specialty, this manifests in conductive additives and in rubber as a circular economy. A concrete example of this is our acetylene-based conductive additives. They are ultra-clean, highly conductive, and there is a production moat from the limited availability of high-volume clean acetylene gas streams. We continue to make progress on the construction of our acetylene-based conductive additive plant in LaPorte. Beyond that, we expect to add additional capacity in North America and Europe coming on stream in the next 3-5 years. Congratulations to the entire team who is bringing our strategy to fruition as we continue to operate as a responsible corporate citizen to all stakeholders. On the operations front, specialty demand, reflecting the broader manufacturing economy, is subdued.

We see this as an opportunity to push customer qualifications and upgrade our plans while things are slow. Meanwhile, we have preserved the underlying value of our business by maintaining end segment per ton profitability. In rubber, as I mentioned earlier, we believe the industry restructuring is evident in our results and will continue. The situation is simple: industry supply dynamics, coupled with our commitment to get a return on invested capital that we as a company and you as shareholders deserve, are driving the reset to more balanced pricing. 2024 negotiations are well underway. We currently have about 60% of our Americas demand committed or in late-stage negotiations, well ahead of past schedules. The pricing outlook remains positive for 2024. We expect to pick up volume at our price points. A couple of items.

First, I remind you, we're negotiating for 2024 and beyond, not for 2023. I don't care about slow demand in 2023 in this context. Except that one year's deferred demand is the next year's supplemental demand, that supplemental demand further tightens the market that we are actually negotiating for. Second, there is a growing carbon black imbalance in our key markets, where tire capacity continues to be added. Third, the EU ban on Russian carbon black starting next July, combined with the growing OEM concern with Russian content in their supply chain, further benefits European carbon black producers. Four, our investments in maintenance, emission controls, and reliability, and abatement costs, they all demand higher prices. Fifth, the expected rebound in replacement tire demand, it's a tailwind. These five largely structural improvements in our markets are positive drivers for us.

Beyond all that, customers want strong, healthy suppliers. Speaking of abatement, we are the only carbon black producer to have completed three air emission control projects in the United States. We have one more plant to go, which we expect to have behind us entering 2024. Now, let's talk about destocking and deferring, starting with rubber. We supply tire manufacturers. They supply tire dealers and large tire retailers. Eventually, a tire retailer sells to the end customer, who's the most important player here. On the bottom of slide four, you can see that passenger car and light truck owners are driving more than last year. On the top of the slide, you can see they are deferring buying replacement tires. I use the term deferring because those tires are getting worn, and they will need to be replaced. Just look at the gas and miles driven.

Trucking companies, they're seeing a decline in loads and hence buying fewer replacement tires. That makes sense. Going forward, you should look at manufacturing PMIs to get an understanding of where that is headed. Now, all this is based on U.S. data. We don't have good, fast data like gasoline or miles or kilometers driven in Europe. However, we believe the picture there is similar. There's also the question of inventory levels, tire manufacturers, distributors, and dealers each keep. There's less visibility here. However, our understanding is that inventories are relatively low and there is little interest in restocking currently until end customer demand picks up. On top of this, our customers express limited confidence in their demand forecast accuracy. Switching to specialty. Here we serve dozens of end markets. In general, customers want low inventories, and by and large, they have them.

Again, there's little interest in restocking. For both rubber and specialty, we expect end customers to defer purchases until the start of 2024, and manufacturers to take extended holidays this summer and winter. We, in turn, will use this time wisely, preparing for 2024, and not destroy value by chasing volume. With that, Jeff, perhaps you could provide some more color on our financial results.

Jeff Glajch (CFO)

Thank you, Corning. On slide five, you can see the continued path of growing profitability, even with the headwinds in our end markets. In 2023, we expect at the midpoint to grow EBITDA 7% versus the full year 2022. While not shown here, EPS is expected to grow 9%. Our portfolio is a combination of the rubber business, which is benefiting from price increases that have more than offset the near-term volume challenges, and our specialty business, which has kept stable pricing with its high value add products. Specialty, too, is facing near-term volume headwinds, the +50% growth in rubber EBITDA in Q2 and in the first half of 2023 has allowed us to deliver respectable earnings growth. Below, you can see our continued ROCE progress over the past few years during a time we made substantial air emission control investments.

The ROCE levels we achieved are significantly in excess of our weighted average cost of capital. ROCE stands at 17%. This key metric keeps us aligned with our shareholders as stewards of their capital and focusing on the long-term sustainability of the company. Now, some more details. On slide six are the consolidated results for the second quarter. The contractual price improvements in rubber outweighed the lower volume in both businesses, as well as lower cogeneration revenue. The year-over-year adjusted EBITDA increase of 5% in the second quarter and the 13% in the first six months of 2023, are a direct result of better pricing in rubber. You may note that the adjusted EBITDA is down in the second quarter despite the increase in adjusted EPS, I'm sorry.

This is a combination of the higher tax rate in the quarter and a couple adjustment items to net income, which went opposite to last year. Slide seven provides the year-to-date results for the first half of 2023. Adjusted EBITDA is up $22 million or 13%, and adjusted net income and adjusted diluted EPS are both up 10%. All three of these are record levels for six months. We achieved this despite a 50% drop in European power rates, which, based on what we shared last quarter, has about a $25 million annual impact. If rates hold where they are now, we expect an additional $2 million-$3 million per quarter impact next year, when certain hedges that we put in place for 2023 expire. We do expect reduced power price and cogen volatility going forward.

On slide eight, the improvement in rubber pricing fully offsets the volume decline in Q2. Our view is that the price improvements in rubber are due to a structural shift in the market, while the volume declines will reverse next year. On to slide nine, looking at specialty in Q2, volumes decreased in most markets, reflecting weakness in the manufacturing sector. Gross profit per ton decreased compared with an extraordinary Q2 level last year. Our trailing twelve-month Gross profit per ton is also down, but above our average levels in 2022 and in the $800-$900 per ton range we have previously discussed. We do not view this quarter's GP per ton negatively, but rather it is near the expected range for this business. Importantly, for the mix of products that we sold in the quarter, our pricing remained stable.

We have not chased volume by dropping prices. Slide 10 shows the key factors affecting adjusted EBITDA for the specialty business compared with last year. As noted earlier, the volume reduction was significant. Margins were affected by fixed cost absorption and lower cogeneration revenue. As I noted on the last slide, pricing was stable for us despite the market conditions. We believe this reflects the strength of our value proposition. Turning to slide 11, the headline is that Q2 rubber EBITDA was up $19 million or 51%, and the first half EBITDA was up $43 million or 54%. The price improvements generated strong profitability metrics despite lower volume and lower oil prices. Gross profit per ton was up from $309 to $429 in the quarter, driven by price improvements.

You should expect the GP per ton to be at similar levels for the remainder of 2023. Slide 12 looks at the key factors affecting adjusted EBITDA for the rubber business. Strong base price is clearly the key driver, offsetting the lower volume and less advantageous geographic mix. For clarification, we gained volume in lower margin Asia, while we saw decreased volume in the higher margin regions. On slide 13, I'd like to provide an update on cash flow and the impact on our debt level and stock buyback. With strong cash flow in the first half, we funded $20 million in share buybacks in the quarter, $49 million year-to-date, and $54 million since we started our buyback program in Q4 2022. This represents 4% of outstanding shares.

As discussed during our Q1 call, as expected, we completed our initial $50 million share buyback program in mid-May. We purchased an additional $4 million in shares toward our new buyback program in the rest of the quarter. We will pace the new buyback program slower and prioritize growth and profit-enhancing projects first, and as long as we stay in or near our target debt range, we plan to continue to look to opportunistically repurchase shares with a portion of our free cash flow. We reduced our net debt an additional $39 million in Q2, $76 million in the first half of 2023 to $783 million. Our debt-to-EBITDA ratio now stands at 2.34 times, down from 2.75 times in December and nearly 3 times at this point last year.

As I look forward across the rest of 2023, I expect our debt level will stay near this, near where it is now and may increase a little, since our CapEx is back-end loaded in 2023. We benefited from lower CapEx in the first half of the year. On slide 14, before I pass the call back to Corning, you can see the dramatic increase in our discretionary cash flow conversion as we have stepped up our profitability and nearly completed our EPA projects. This gives us much more flexibility to invest in growth projects, reduce our debt, and opportunistically buy back shares. I expect the 60%+ conversion rate that we have in 2023 to continue in the coming years. That, I'll turn the call back to Corning to discuss our 2023 guidance.

Corning Painter (CEO)

Thanks, Jeff. Turning to slide 15, as we both said earlier, we continue to believe we will report another record year. We also believe that we're in a strong position going into 2024, with about 60% of our Americas and EMEA rubber demand already essentially committed. For this year, we expect end customer purchase deferral and destocking to continue into Q3 and Q4. We also expect the lower power prices in Europe to continue to prevail. Taking that into consideration, we are updating, excuse me, our adjusted EBITDA guidance to the $320 million-$350 million range, which is up over 7% at the midpoint. Our adjusted EPS guidance range of $2.00-$2.25 per share, up 9% year-over-year at the midpoint.

In closing, I would remind you that first, our specialty business is doing well. Naturally, volumes are down when manufacturing activity is down. However, our unit margin, reflecting the strength of our business, is holding at high levels. Meanwhile, we're driving our future growth by progressing our conductive additive plant in LaPorte and advancing customer qualifications across many markets. Second, we believe the step-up in our rubber pricing is necessary and at a sustainable level from which we will grow. Third, the current disconnect between miles driven, gasoline consumption, and replacement tires is not sustainable. Those tires will need to be replaced. The OEM market, which drives our higher margin specialty and MRG businesses, has begun its recovery. Fourth, with higher profitability and the U.S. air emissions spending nearly behind us, our cash flow conversion has improved dramatically.

I continue to see a great future for Orion as a company and as an investment. The steps we have taken and the strategy we have embarked upon provide a great foundation for sustained profitable growth, free cash flow, and exceptional returns for our shareholders. Thank you. Kyle, please open the line for questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Christopher Kapsch with Loop Capital Markets LLC. Please go ahead.

Christopher Kapsch (Analyst)

Hey, thanks. Good morning. Thank you for the details around the, the characterizing the ongoing tire contract negotiations for, for next year. Could you remind us, like, what percentage of your existing contract already had multi-year agreements in place where there was, you know, already an increment in pricing baked in for next year or beyond? Curious about the agreements that are being resolved now, how does the magnitude of price- pricing that you alluded to compare to those that have already been baked into the multi-year deals? If, if there's any way to characterize this by, by geography, that'd be helpful, too.

Corning Painter (CEO)

Hi, Chris. First of all, thanks for your, your question. I appreciate it. We had about 50% of our volume under contract going into it. As you said, we had a step-up in those contracts going from 2023 to 2024. I expect that we will do better than that with the new contracts that we sign this year. It's, it's early days, but that's my expectation, and I'm, I'm okay with that because I think it's a better allocation of risk and commitment between the companies, and we're prepared to do that sort of thing. I think that's a good development overall for the industry.

I'd say in general, there's more interest for people to get the contract quickly in Europe right now and versus North America or South America, just because of the, the upset there with the Russian capacity, which was, you know, probably about 35% of that market. Some customers, as we estimated, as much as 50% of their carbon black was coming from Russia. There's, there's certainly some people who are quite interested in that. Did, did I miss anything there, Chris?

Christopher Kapsch (Analyst)

No, that, that's, that covers it. That's helpful. The follow-up would be, you know, I, I like the way you characterized the current destocking presumably represents deferred or latent demand, incremental demand for next year. Assuming that this destocking runs its course, you know, let's just say by calendar year-end, and there's normalization in demand trends next year, is there any way to characterize what you think the, the industry capacity utilization rates would be by region? You know, in sort of the core rubber black, not specialty area. Thank you.

Corning Painter (CEO)

Sure. Just to clarify, I mean, I think, you know, it's not one day when every customer decides, "Okay, I'm gonna stop deferring." I think we'll see that turning in the fourth quarter. I don't think we, as a company, will see the impact of that until January, just because in the fourth quarter, you've got holiday shutdowns and that kind of things. I think it's that kind of a time frame. It's been a relatively long deferral. What I think that means for us then going forward is rubber capacity in Europe will be at very high levels, and that will be basically where people can operate it at. I would say high 80s, low 90s. I think North America will also be very high levels of industry utilization, again, just because of supply-demand. We get back to a more normal run rate in demand.

I think, capacity in both areas will be tight. We will have our EPA work behind us. At least one major competitor will not, right? When they go through it, that'll probably have an impact in demand or capacity for North America next year.

Christopher Kapsch (Analyst)

Helpful. Thank you.

Operator (participant)

Our next question comes from Jon Tanwanteng with CJS Securities. Please go ahead.

Jon Tanwanteng (Managing Director)

Hi, thanks for taking my question. I was wondering if you could give us a little bit more color on the inventories that your customers, you know, compared to where they would normally be in, in this kind of demand environment, and how long they can actually keep drawing down before they reach, you know, a critical level or, or a level that put their business at risk. Have your customers actually told you that they're specifically drawing down, or is that just more research on your end based on, on what you're seeing in the market? You know, just help us get more clarity on, on what, what, what's giving you the confidence that things will come back and kind of when, when they will?

Corning Painter (CEO)

Sure. So two things there. Number one, it's, of course, cutting across many different customers. In specialty, many, many. In rubber, let's say many. Those customers don't always express tremendous confidence in exactly what is in all the downstream channels. I know everybody's interested in this question of destocking. I'll just tell you, I think end customer demand and the deferring there, which you can see in that gasoline and miles driven versus replacement tires, I really think that's the best data we have. Now, more anecdotally, when you talk to these guys, they talk about, "Yes, we're at a very low inventory level." If end customer demand dropped lower, well, then that might be a little bit more inventory than they think they need. They might be able to draw that down.

If it steps up a little bit, right, they would have to buy a little bit more. I, I think they're at low levels. I will never tell you it can't get worse, or they couldn't destock more. Our view is, and when we talk to these guys, they all express. Not they all. They unbalanced express that they are at low inventory levels, but very reluctant to make a step up in inventory. The one thing we may see in this month is, with the rise of oil prices, we may see some people buying in front of that. In specialty, okay, that'll help August. It'll hurt September. I don't see that as very significant.

Jon Tanwanteng (Managing Director)

Okay, got it.

Corning Painter (CEO)

Let me just one other thing. You have a few guys who have talked about, you know, a little bit of uncomfort, that they're, like, below their safety stock level. Again, that's some. You have to really look across the balance of the whole industry.

Jon Tanwanteng (Managing Director)

Okay, understood. As your customers get down to these critical inventory levels, assuming demand, you know, stays roughly where it is, I mean, how, how much leverage does that create on pricing for you as you enter the new year? I know tire, you know, contracts are generally negotiated far ahead of time, but in the rest of your business, wouldn't that give you also some, you know, a lot better leverage as you enter the new year? You know, especially as capacity remains limited and these guys start to restock.

Corning Painter (CEO)

Well, well, John, the way this game works is the, the buyers right now are saying, "Oh, demand's weak. You need the load. You need to give me a good price." We're saying, "Yeah, no, no, no, no. We're not negotiating for 2023. We're negotiating for 2024." That's an obvious thing in the annual cycle for rubber, but it plays out in specialty as well. The key point here is, in specialty, we're selling value. We're selling a solution, right? We're not looking to, you know, take advantage of the market conditions, nor be a victim of them, right? We're looking to keep a, a fair price in our specialty and move it up where we need to and get our new products qualified and, and basically be agnostic to the current market conditions.

Yeah, I mean, I think to an intelligent buyer, they can see what's gonna happen next year.

Jon Tanwanteng (Managing Director)

Okay, great. Just one more thing. Can you just break out the impact of cogeneration? Kind of what, what has been your expectation and what has been the change there, I guess, in the outlook that, you know, specifically from that piece of the business?

Corning Painter (CEO)

Sure, I, I, I can let Jeff go more. Just to say, when we gave our, our last guidance, right, at the end of, of Q1, we were really looking at what power rates were at that time, and we expected them to just stay where they are. I thought that they might actually pick up a bit this summer in Europe, which has not happened. I think it was in my part of the script last quarter when I said that for, you know, every move of about 20% would be about $10 million, and it's moved about 50% down. That's how you get to a annual run rate of, of the $25 million that Jeff mentioned. Jeff, anything you want to add to that?

Jeff Glajch (CFO)

Sure. Jon, yeah, to Corey's point, the 50% reduction in power prices would get you somewhere in the $25 million range for from a profitability standpoint. If you look right now in the key markets, I think if you were to look at Germany, it's down about 50%, perhaps, year over year. If you look at Italy, it's down maybe closer to 40%. There's not been a step up in the summertime. Even though it's very hot there, there's not been a step up in summertime power costs. So we're... As the year goes on, we're expecting this lower level to remain, which is lower than what our expectation had been, three or four months ago.

We had a little bit of impact in the first quarter, a little bit more in the second quarter, and expect a bigger impact in the third and fourth quarter if these levels remain where they're at.

Corning Painter (CEO)

Just to give you my thought, like, this is a net positive for everybody, right? It's going to mean the European economy is stronger. It's also going to help consumer demand in Europe. One other thing to understand is that we did hedge last year. Congratulations to our energy team. It was a very good timing. Those hedges will expand, expire at the end of this calendar year, so that's going to give us a headwind next year of about $10 million.

Jon Tanwanteng (Managing Director)

Great. Thanks, guys. I'll jump back in queue.

Operator (participant)

Our next question comes from John Roberts with Credit Suisse. Please, go ahead.

John Roberts (Managing Director and Senior Equity Research Analyst)

Thank you. Slide 10 has the year-over-year bridge for the specialty chemical EBITDA. If you were going to build that slide on a sequential quarterly basis, what would it look like? The, the volumes were actually relatively flat sequentially.

Corning Painter (CEO)

Yeah. I would have to take a quick look at that. I think that our price mix has not shifted dramatically time on quarter-on-quarter. Volume, Jeff, how do we look quarter-on-quarter?

Jeff Glajch (CFO)

Yeah. I think volume, we might be down a little bit, versus.

John Roberts (Managing Director and Senior Equity Research Analyst)

Well, it's there on the right-hand column. Yeah. I mean, you give the quarter-over-quarter-

Corning Painter (CEO)

Oh, I'm sorry. You're looking at.

John Roberts (Managing Director and Senior Equity Research Analyst)

volume in the table.

Corning Painter (CEO)

Sorry, sorry, you're looking at slide 9.

Jeff Glajch (CFO)

I'm, I'm sorry.

Corning Painter (CEO)

Different, different counter or slides.

Jeff Glajch (CFO)

Got it.

Corning Painter (CEO)

I'm sorry, your question then, with comparing these two, what in particular would you point out?

John Roberts (Managing Director and Senior Equity Research Analyst)

What, what caused the, yeah, sequential decline? Because volume was stable, and it sounds like price was mixed significantly negative sequentially.

Corning Painter (CEO)

Yeah, mix was.

Jeff Glajch (CFO)

Yeah. Jeff, John, I'm sorry. I thought you were asking about looking forward, Q2 to Q3. Q1 to Q2, yeah, mix was down. As well, we talked about the cogeneration piece that hits us specialty pretty significantly, and with the lower volume, there was a little bit more fixed cost absorption. You kind of throw that all in a basket, and.

Corning Painter (CEO)

Well-

Jeff Glajch (CFO)

as you can see, it really hits the gross profit line.

Corning Painter (CEO)

Plus, we shared last time that the $101 million of EBITDA benefited from some one-time and timing effects.

Jeff Glajch (CFO)

Yeah.

Corning Painter (CEO)

A lot of that was in specialty. That's partially how the GP per ton was so high in specialty in Q1. Just the absence of those things, we're going to take the profit quarter-on-quarter down a little bit as well.

Jeff Glajch (CFO)

Yeah, that, that alone is probably a third of the reduction.

John Roberts (Managing Director and Senior Equity Research Analyst)

Okay. Then how are your China operations doing?

Corning Painter (CEO)

We were volume positive there. We're in startup of a new plant. I think, you know, China is a weak market now. That is for sure. I think one thing to keep in mind for us is that on rubber, you know, we are like 100 KT, you know, a 4,000, 5,000 market, volume market. For us to find ways to place our product is maybe a little bit easier than other folks. We're very busy with the startup and everything associated by that, but otherwise, you know, tough market, but, we're fighting it out.

John Roberts (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Our next question comes from Josh Spector with UBS. Please go ahead.

Josh Spector (Director of Equity Research)

Yeah, hi, thanks for taking my question. First, I, I want to make sure I understand the cadence through the rest of the year correctly and how you're thinking about the moving pieces. I guess from what I've heard so far, it seems like maybe there's a $5 million sequential step down because of the cogen energy dynamic. Seems like demand sounds stable-ish at these lower levels, so maybe you're in the low $80 million range for 3Q. 4Q, typically is 10% lower or so. I mean, that gets me roughly to the high-end-ish of your guidance. I guess, what else would be the moving parts in there, volume or otherwise, to consider?

Corning Painter (CEO)

May I... I'll just make a couple of general comments and I'll let Jeff. Jeff will probably go into the specifics for you around it, but I would also just say, you know, we and a competitor, both mid-quarter, made some announcements about how we saw volume. It is a fairly dynamic time. I think the industry, including the tire guys, were surprised, for example, about the trucking volumes. You know, just as we had some positive things happen in Q1, you know, these things can balance themselves out over time. Jeff?

Jeff Glajch (CFO)

Sure. Josh, I think your, your thought process on Q3 is probably not too far off. If I think about Q4, you know, typically you see shutdowns by our customers. You know, as Courtney mentioned earlier, the thought is perhaps those shutdowns may be a little longer than normal. I think that's probably a meaningful impact. If I think about if, if you look at last year's Q4, you know, one way to look at our guidance, if you look at the midpoint of our guidance, it would suggest that Q3 and Q4 are in line with what Q3 and Q4 looked like last year. Obviously, we've got the benefit of rubber pricing, but as you mentioned, we've got the impact of the cogeneration.

Perhaps we've got a, a view on volume. We typically do see a, a drop-off in Q4, and I, and I thought process is with the dynamics going on in the market, and our, our customers staying at lower inventory levels, that we could see a similar kind of drop-off in Q4 of 2023, that perhaps we saw in Q4 of 2022.

Josh Spector (Director of Equity Research)

Okay. No, that makes sense. Just maybe a little bit near term and long term, I guess. Your competitor talked about some pressure within some of the conductive carbon market pricing and demand. I'm curious if you could describe what you're seeing in your acetylene black demand.

Jeff Glajch (CFO)

Mm-hmm

Josh Spector (Director of Equity Research)

... and pricing at the moment, and also notice you trimmed some of your growth CapEx. I don't know if you're delaying anything there or if it's just timing of some of those investments. Just curious on the driver there. Thanks.

Corning Painter (CEO)

Yeah. No, the change in our capital is more around execution and looking at certain projects and where we are on the timing for them. We, we continue to advance the acetylene project. We also would agree there's China is a more challenging market. There is some differentiation of different materials used in different kinds of batteries and so forth. What I'd add to that is we also see that as an opportunity, and that for the LFP, we're also looking at some other products that are better priced for that market and for their needs and the price points that they work out at. Given our overall size in this market, we see that as basically an opportunity for us, and one that gives us the ability to have multiple tiers of offerings going forward.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Okay, thank you.

Operator (participant)

Our next question comes from Laurence Alexander with Jefferies. Please, go ahead.

Daniel Rizzo (Research Analyst)

Hi, this is Daniel Rizzo in for Lawrence. You, you mentioned that the, the carbon black supply-demand tightness. I was wondering if you would consider, I don't know, adding either brownfield or greenfield capacity, and if not, what would have to change to kind of make that viable?

Corning Painter (CEO)

Sure. When you think about making an investment, you have to think about return of capital, which means you have to think about what's the right hurdle rate. That means you have to think about what's the business model. The current business model, where most customers do a short-term contract, and by that I mean 1 to 3 years. All right, it's a little bit longer now than it used to be, but still very few more than, 1, 3 years. I, I think that puts you in a certain risk position around adding capacity. So we would really be looking for more of a, of a, a longer-term mutual commitment between the two parties that would just give us more surety. With that surety, of course, we'd be willing to accept a lower hurdle rate.

Personally, I think that is the way forward for this industry, and we'll see if we can move in that direction.

Daniel Rizzo (Research Analyst)

I think we could describe it as something more akin to what we see in industrial gases, where there's a, I don't know, like a 10-year commitment and, and kind of co- co-building. That, is that what we're, we're probably thinking about?

Corning Painter (CEO)

Yeah, yes. I, I come from the industrial gas industry. I think there's two business models there. There's where there's dedicated capacity, those tend to have a 10-year agreement. There's also more of a merchant approach, which is more like five years. There's a little more flexibility. I think something in those areas is what could make sense to add capacity. That's, that's our view of it.

Daniel Rizzo (Research Analyst)

Okay. Then just one other question. I think you mentioned adding new capacity in carbon additives in Europe. I was wondering if, I don't know, just the fluctuations, particularly in energy costs, is maybe having you rethink that, that building in that region would be better, or maybe it's better to export into the region?

Corning Painter (CEO)

Let's be clear. We said that in the next three to five years, we see ourselves adding capacity in North America and in Europe. I think those will be growing markets, right? There's already a pretty large market in China. I think that we're gonna see gigafactories of batteries become more democratic, so to speak, and spread out geographically. There's all these things about geopolitical concerns, about trade and everything else. We think there's gonna be demand in each space. Based on that, we'd be interested in being there. Mind you, we're typically using a by-product for not making our carbon black. I'm sorry, our acetylene conductive material. You know, that's something that we would look to see have that balance out. To be clear, if there isn't a good return on investment, we will not do that.

Daniel Rizzo (Research Analyst)

All right. Thank you very much.

Operator (participant)

Our next question comes from Jeffrey Zekauskas with J.P. Morgan. Please, go ahead.

Corning Painter (CEO)

Jeff? Good morning, Jeff. Are you there? Maybe on mute.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Oops, sorry. Can you hear me now?

Corning Painter (CEO)

Yes. Good morning, Jeff.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Sorry about that. Yep, good morning. In, in the rubber black area, you said that 60% of your contracts for next year were in good shape or signed. Is that all Europe, or is that, is that large number really reflecting the European market?

Corning Painter (CEO)

Yeah, let's be clear. That is, EMEA-

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Okay

Corning Painter (CEO)

... and the Americas combined.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Right. If you strip it out, and, like, how much is in Americas and how much is in EMEA? They're very different markets, no?

Corning Painter (CEO)

I, I think for us, though, the % contracted is going to be similar. Maybe it's a little bit higher in EMEA right now, just because people are going a little more quickly on that. When, when we did last year, we ended last year with about half of our volume committed. That was the ratio we chose to take.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Okay.

Corning Painter (CEO)

That was pretty well split between Americas and EMEA.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

you know, in listening to what all the different companies that make carbon black say, you know, some, some companies point to a more contentious price negotiation. Are, are your carbon black prices simply lower in rubber black than some of your competitors historically, and so you have more room to raise your prices?

Corning Painter (CEO)

Mm-hmm.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Is that a fair characterization?

Corning Painter (CEO)

I, I don't know exactly what my competitors' prices are. The only feedback we get on that is from our customers, who are, are, of course, very unlikely to lay out the scenario you just said, Jeff. I, I have no idea what their pricing is, what their pricing policy is, or anything else. I'd say the situation's a little bit like, let's imagine there's an airline route, and there's only let's imagine, I don't know, you know, there's, there's 550 people who want seats, and across the various airlines, there's only 500 seats. That's, that's kind of how Europe is, it's kind of how North America is. If someone's gonna be discount offering, you know, Freddie Laker is out there selling seats at a real discount, it doesn't matter because Freddie can fill up his airplane.

He can't, like, lease a new plant. It's not like the airline business, our business. You know, then what's left is left. It's just a fact. I think it's also important to note, like, I don't think our prices or the industry prices are that high. People are, like, getting to return on capital pricing. This is where pricing needs to be. This is why that plant closed in North America, in my opinion. This is why this company closed in Ambès, what, in 2016. When I joined this company in 2018, and I did my first round out there with customers, I got people giving me very harsh words that Orion had closed this plant in France two years ago, right? Why? I mean, it, it's because the pricing was too low and, and people were buying from Russia.

We're just kind of, like, getting back to a balanced place, in my view. I don't think it is extraordinarily high or anything else. Yeah, it's a change, but that's the change you need if you want to have reliable supply and plants that get invested in and maintained. I think what's happening is a reset to normality.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

I guess finally, can, can you talk about the trends in specialty pricing and, you know, where they're going? Are they moving lower? Are they moving higher? What the future of those returns is.

Corning Painter (CEO)

We work hard for our end markets to have a value proposition in those places. Yeah, prices can move up and down with different impacts, energy amongst them. We're not looking to fundamentally say, "Oh, what we get in coatings isn't a high enough return for us." I think what our view is, that our position is, we're looking at this time when demand is soft, not to chase volume by lowering price, so that then when the market turns and the volume comes back, like, your business is damaged, it's not as good as it once was. Our view is we're providing value, we're providing a solution to our customers, that we should maintain the, let's say, unit price in that space.

You are still going to see fluctuation in our overall GP per ton on mix, on things like power, but, you know, our view is the, the, the value of this product is, is not diminished just because demand is a little slow right now.

Jeffrey Zekauskas (Managing Director and Senior Equity Research Analyst)

Mm-hmm. Okay, great. Thank you so much.

Operator (participant)

Our next question is a follow-up from Jon Tanwanteng with CJS Securities. Please go ahead.

Jon Tanwanteng (Managing Director)

Hi. Yes, I was just wondering if, if you could give a little bit more color on your plans for the buyback. I think you said you were going to be a little bit more measured and less aggressive, you know, compared to the $50 million that you already spent. You know, if share prices go lower, I mean, how does that rank compare to the other uses of cash that you're considering, whether it's debt pay down or investments? I see you took down your CapEx as well.

Jeff Glajch (CFO)

Sure, John, this is Jeff. If you think about our buyback, our first $50 million buyback, we bought back shares at approximately $10 million per month to get to that $50 million by mid-May. Then since mid-May, we took that pace down a little bit. To your point, we are looking at this opportunistically. I think it's probably fair to assume that we'd be a little more aggressive if prices were a little lower and a little less aggressive if prices were higher. It's not a static model. It's our thought process is very dynamic there, and we will be more aggressive if prices are perhaps a little bit lower.

Jon Tanwanteng (Managing Director)

Okay, thank you.

Operator (participant)

There are no further questions at this time. I'd like to turn the floor back over to Corning Painter for closing comments.

Corning Painter (CEO)

Okay, I'd like to thank our analysts for your excellent questions and the time today. Thank you very much. This is an exciting time for our company and for the industry, and we really appreciate our investors' continued support. We look forward to seeing you very soon. We're gonna be escaping the heat of Houston by coming up for two conferences in New York in September, and we welcome other opportunities to meet you. We're out on the road this fall. Thanks again. Have a good day.

Operator (participant)

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