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Orion S.A. (OEC)·Q2 2020 Earnings Summary

Executive Summary

  • Net sales fell to $202.6M (down 49.2% y/y) on the lowest volume quarter in Orion’s history; Adjusted EBITDA dropped to $15.2M and basic EPS was $(0.30); adjusted EPS was $(0.14) .
  • Despite the steep downturn, Orion generated $85.7M in operating cash flow, driven by a $77.3M working capital release; accessible liquidity rose to $333M after adding ancillary lines and revolver conversions .
  • Specialty Carbon Black showed resilience with a 17.5% adjusted EBITDA margin; Rubber Carbon Black was deeply pressured with adjusted EBITDA of $(1.2)M and margins of (1.1)% amid volume declines and inventory revaluation impacts .
  • Management withdrew full-year guidance in March but raised 2020 capex back to $140–$145M; EPA U.S. air-quality investments were confirmed at a ~$250M midpoint, with ~$135M remaining across 2021–2023, positioning for reinvestment returns on recovery .

What Went Well and What Went Wrong

  • What Went Well
    • Positive cash generation in a trough quarter: $85.7M operating cash flow and a $77.3M working capital release; accessible liquidity increased to $333M, giving confidence navigating the downturn .
    • Specialty Carbon Black profitability resilience: adjusted EBITDA $16.5M and margin 17.5% on favorable mix, underscoring franchise quality (“mid-teens margins in these extraordinary times”) .
    • Strategic cost actions: ~$10M cost reductions in Q2 cushioned EBITDA; permanent savings expected at ~$3M; fixed costs lowered via capitalization of labor during downtime .
  • What Went Wrong
    • Demand collapse: volumes down 42% y/y with Rubber volumes down 46.4% y/y; contribution margin fell 48.2%, driving adjusted EBITDA down 78.7% y/y to $15.2M .
    • Rubber segment profitability deteriorated: adjusted EBITDA $(1.2)M, margin (1.1)%; gross profit per ton fell 69% due to volumes and inventory revaluation .
    • Net loss and EPS: net loss $(17.8)M; basic EPS $(0.30) vs $0.41 y/y; adjusted EPS $(0.14) vs $0.53 y/y, reflecting extraordinary COVID costs and other adjustments .

Financial Results

MetricQ2 2019Q1 2020Q2 2020
Net Sales ($M)$399.0 $336.0 (calc: H1 $538.7M − Q2 $202.6M) $202.6
Net Income ($M)$24.7 $18.0 $(17.8)
Basic EPS ($)$0.41 $0.30 $(0.30)
Adjusted EPS ($)$0.53 $0.44 $(0.14)
Adjusted EBITDA ($M)$71.5 $63.8 $15.2

Notes:

  • Q1 2020 Net Sales derived from six months ended June 30, 2020 ($538.655M) minus Q2 2020 Net Sales ($202.648M) .

Segment breakdown (Q2):

Segment MetricQ2 2019Q2 2020
Specialty Volume (kmt)69.9 49.5
Specialty Net Sales ($M)$139.3 $94.4
Specialty Adjusted EBITDA ($M)$31.0 $16.5
Specialty Adjusted EBITDA Margin (%)22.3% 17.5%
Rubber Volume (kmt)200.6 107.5
Rubber Net Sales ($M)$259.7 $108.3
Rubber Adjusted EBITDA ($M)$40.5 $(1.2)
Rubber Adjusted EBITDA Margin (%)15.6% (1.1)%

Segment EBITDA trajectory:

Segment Adjusted EBITDA ($M)Q4 2019Q1 2020Q2 2020
Specialty$31.8 $28.1 $16.5
Rubber$31.4 $35.8 $(1.2)

KPIs and balance sheet:

KPIQ1 2020Q2 2020
Operating Cash Flow ($M)$4.9 $85.7
Accessible Liquidity ($M)$247 $333
Net Leverage (x, LTM)~2.5x (end Q1) ~3.0x
Cash & Equivalents ($M)$107 (end Q1) $143.4
Free Cash Flow ($M)n/a$53 (Adj. EBITDA − capex − ΔWC, management-defined)

Performance context:

  • YoY: Net sales down 49.2%; adjusted EBITDA down 78.7%; contribution margin down 48.2% .
  • QoQ: Adjusted EBITDA fell from $63.8M in Q1 to $15.2M in Q2 as volumes and margins compressed; net income swung from +$18.0M to $(17.8)M .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Capital ExpenditureFY 2020$120–$130M (lowered in Q1) $140–$145M (restored in Q2) Raised
EPA U.S. Air Quality Investments (total)2018–2023Range $230–$270M; midpoint ~$250M (Q1 prelim) Midpoint ~$250M confirmed by FEL2; ~$115M spent by YE20; ~$135M remaining 2021–2023 Confirmed / refined
EPA Spend Phasing (remaining)2021–2023n/a~$65M (2021), ~$50M (2022), ~$20M (2023) New phasing detail
Dividend PolicyFY 2020Maintain ~$48M dividends (Feb guidance) Dividend suspended; no Q2 dividend; reduced cash outflow Lowered
Accessible LiquidityQ1 → Q2 2020$247M firepower at any EBITDA level $333M accessible liquidity after ancillary lines Raised
Working Capital OutlookQ2 / Q3 2020Expected Q2 windfall >$50M (oil & sales) Expect WC investment in Q3 if oil in mid-$40s and volumes recover Direction reversed
FY 2020 EBITDA GuidanceFY 2020$250–$280M (Feb) Guidance withdrawn in March Withdrawn

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4’19 & Q1’20)Q2 2020Trend
Supply chain/logisticsLogistics friction (blank sailings, port issues) expected to be a global economy headwind Reliability issues in logistics managed via agile scheduling and inventory strategies Friction persisted but manageable
Macro/tariffs & demandMacro malaise in end markets; expectation of seasonal restocking; rubber pricing offsets Sequential recovery in Rubber from April lows; July strong but caution on sustainability amid COVID and US supplemental UI changes Recovery fragile
Regulatory/EPA projectsCompliance schedule and spend progressed; $51M EPA capex in 2019 FEL2 confirms ~$250M total; phasing laid out; Orange emissions project completed, reducing NOx by ~2,300 metric tons/year Execution advancing; cost clarity improved
Pricing & reinvestment economicsStrong rubber pricing and surcharge mechanisms to dampen feedstock differential volatility Specialty pricing resilient; rubber base pricing favorable; focus on pricing to reinvestment-level returns Pricing discipline sustained
Regional trendsSpecialty down NA, growth in China; rubber seasonal softness Rubber recovered across geographies; Specialty lagged rubber; APAC held up better earlier Rubber leading the rebound
Liquidity & capitalStrong cash generation; ample revolver flexibility Liquidity accessible raised to $333M; net leverage ~3x; covenants structured to avoid springing trigger after ancillary conversion Strengthened liquidity stack
ESG/communitySustainability report; governance enhancements Community PPE donations; Orange emissions upgrade completed despite pandemic Ongoing ESG execution

Management Commentary

  • “Against the backdrop of the pandemic, the Orion team did an excellent job… Generated $85.7 million of operating cash flow despite sharply lower volumes and profitability.”
  • “Specialty business delivered solid profitability, mid-teens margins in these extraordinary times… demonstrates the quality and the strength of that franchise.”
  • “We are returning our 2020 capital forecast to the $140 million to $145 million range… FEL2 confirms the cost range… midpoint $250 million.”

Q&A Highlights

  • Restocking and July strength: July volumes significantly above June; management cautioned sustainability given macro factors (COVID spread, US supplemental UI reductions) .
  • Margins through the cycle: Decremental proxies of 30–35% (Rubber) and mid-40s (Specialty) apply on both downside and upside; some Q2 cost reductions (bonus accruals reversal, capitalized labor) won’t persist .
  • Inventory revaluation: ~$5M negative impact in Q2, lower than expected; no carryover anticipated absent sharp oil declines .
  • Capex phasing: Remaining EPA spend phased ~$65M (2021), ~$50M (2022), ~$20M (2023); some projects advanced during downtime .
  • Raw materials: No material constraints; stable supplies through volatility in refining/chemicals markets .

Estimates Context

  • S&P Global consensus estimates for Q2 2020 were unavailable due to access limits at the time of retrieval; as a result, comparisons vs consensus cannot be provided and should be treated as “not available.” If desired, we can re-run consensus checks when access is restored.
  • Given unavailability, note that actual results were: Net sales $202.6M, basic EPS $(0.30), adjusted EPS $(0.14), adjusted EBITDA $15.2M .

Key Takeaways for Investors

  • Liquidity and cash flow were standout positives in a trough quarter ($85.7M OCF; $333M accessible liquidity), lowering downside risk and supporting capex execution through the cycle .
  • Specialty Carbon Black’s profitability resilience (17.5% adjusted EBITDA margin) underpins medium-term earnings power as broader demand normalizes .
  • Rubber’s sharp volume compression and margin erosion to (1.1)% reflect sensitivity to global mobility; sequential volume recovery is underway, but management cautions July strength may not persist .
  • Cost actions (~$10M in Q2, ~$3M permanent) and operational agility (capitalized labor during downtime) helped cushion EBITDA; expect some costs to return with volumes .
  • EPA investments now have clearer scope (~$250M midpoint) and phasing, reinforcing the focus on pricing for reinvestment-level returns; successful Orange project delivers tangible ESG outcomes (NOx −2,300 mt/year) .
  • Working capital tailwinds likely reverse in Q3 with higher volumes and stable oil in mid-$40s, implying WC reinvestment; model cash needs accordingly .
  • With formal FY guidance withdrawn, trajectory will be driven by Rubber demand normalization, Specialty mix, and execution on pricing and capex—monitor segment margins and monthly volume trends for near-term trading signals .