Orion Engineered Carbons S.A. Announces First Quarter 2020 Financial Results

HOUSTON–(BUSINESS WIRE)–$OEC #chemicals–Orion Engineered Carbons S.A. (NYSE: OEC), a global supplier of specialty and high-performance carbon black, today announced its first quarter 2020 financial results.

First Quarter 2020 Highlights

• Rapidly implemented business continuity plan and took actions to protect our employees and our production capability, support our customers, ensure supply chain stability and enhance our financial standing
• Enhanced financial flexibility by suspending dividend and bolstering cash position
• Net sales of $336.0 million compared to $384.7 million in the first quarter of 2019
• Net Income of $18.0 million and basic EPS of $0.30 compared to $19.0 million and $0.32 in the first quarter of 2019
• Adjusted EBITDA¹ of $63.8 million compared to $64.6 million in the first quarter of 2019
• Adjusted Net Income of $26.6 million and Adjusted EPS¹ of $0.44 compared to $23.8 million and $0.40 in the first quarter of 2019
• Leverage ratio of 2.49x LTM Adjusted EBITDA compared to 2.28x at year-end 2019

  ¹ See below for a reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP measures

“I would like to thank our people for their dedication in the face of the pandemic. Our first priorities were the safety of our people and supporting our customers. The team implemented numerous COVID-19 driven safety protocols and actions with speed. As a result, during the quarter, we were able to run every Orion plant: in China, Korea, Italy, the U.S. – all of them – to support our customers. Where demand slowed our people have been flexible allowing us to drive operational and safety improvements with everyone pitching in. Against the backdrop of this extraordinary time, our teams also made time to support health care workers in our communities with personal protection equipment donations.

“Orion executed well in the first quarter and we were on track for strong financial results until the latter half of March when many tire customer plants shut down. Still, we delivered Adjusted EBITDA of $63.8 million despite the shutdowns, an abrupt halt in consumer spending and miles driven and a sharp decline in oil prices. In response to COVID-19, we acted swiftly by implementing our pandemic business continuity plan, taking action to protect our employees and production capability, support customer relationships, ensure supply chain stability and strengthen our financial standing,” said Mr. Corning Painter, Chief Executive Officer.

“While uncertainties continue, society will emerge from this, and our end markets will rebound. In particular, we believe driving is going to be a popular mode of transportation and we are working to be stronger than ever to serve our customers.”

First Quarter 2020 Overview

Overall volumes decreased by 10.5%, or 27.7 kmt, to 235.1 kmt year over year, principally reflecting the impact on the Rubber and Specialties segments of a sharp reduction in sales volume beginning in mid-March as tire manufacturing plants began idling or closing outright in anticipation of the negative implications of the COVID-19 pandemic on miles driven and light vehicle sales. Lower volumes also reflected the impact of a deliberate Rubber commercial strategy as part of 2019 contract negotiations to emphasize raising price closer to reinvestment levels over volume.

Net sales decreased by $48.7 million, or 12.7%, year over year, to $336.0 million driven by lower volumes, passing on lower feedstock costs to customers and negative foreign exchange rate translation effects, partially offset by favorable product mix and positive base price increases.

Income from operations increased by $2.8 million, or 8.2%, to $37.5 million, year over year. Lower gross profit was more than offset by lower selling, general and administration expenses year over year. The decrease in selling, general and administrative expenses was primarily due to lower personnel related expenses related to bonuses including long term incentive expenses, lower distribution expenses as a result of lower volumes and favorable impacts from foreign currency translation impacts.

Net Income decreased by 4.9%, or $1 million to $18.0 million, year over year, primarily due to a combination of higher financial expenses related to foreign exchange rate losses offsetting the increase of income from operations.

Contribution Margin decreased by $4.4 million, or 3.3%, to $131.9 million, year over year, mainly driven by lower volumes and negative foreign exchange rate translation effects partially offset by favorable base price increases in the Rubber segment in particular and a favorable product mix in the Specialty segment in particular.

Adjusted EBITDA decreased by $0.7 million, or 1.1% to $63.8 million, year over year, reflecting lower contribution margins and higher fixed costs of sales offset by lower selling and administrative expenses and positive foreign exchange translation effects on fixed costs.

Quarterly Business Segment Results

Volumes for the Specialty Carbon Black business decreased by 8.8% to 58.3 kmt, year over year, mainly due to weakening demand in the North America and Western Europe regions predominantly in the automotive and pipe markets.

Net sales decreased by $11.8 million, or 9.0% to $119.8 million year over year, mainly due to lower volumes and the pass through of lower feedstock costs to customers, partially offset by favorable product mix and base price increases.

Gross Profit decreased by $1.7 million, or 4.0% to $39.7 million, year over year, primarily due to lower volumes and negative foreign exchange rate translation effects partially offset by higher base price and favorable mix.

Specialty Adjusted EBITDA decreased by $1.3 million, or 4.5%, to $28.1 million, year over year, primarily driven by the factors driving lower Gross Profit. Adjusted EBITDA margin increased 110 basis points to 23.4% compared to 22.3% in the first quarter of 2019.

Rubber Carbon Black volumes decreased by 22.0 kmt or 11.1%, year over year, primarily attributable to a sharp decline in sales volumes beginning in mid-March as tire and auto manufacturing plants closed due to COVID-19. Lower volumes also reflected the impact of a deliberate Rubber commercial strategy as part of 2019 contract negotiations to emphasize raising price closer to reinvestment levels over volume.

Net sales decreased by $36.9 million, or 14.6% to $216.2 million, year over year, primarily due to lower volumes and passing through lower feedstock costs to customers partially offset by base price increases.

Gross profit decreased by $6.1 million, or 10.8% to $50.5 million, year over year, as a result of lower volumes and negative foreign exchange translation offset in part by base price increases and favorable absorption due to inventory build.

Rubber Adjusted EBITDA increased by $0.6 million, or 1.7% to $35.8 million, year over year, reflecting higher base prices and favorable absorption partially offset by lower volumes. Adjusted EBITDA margin was 16.5% in the first quarter of 2020 compared to 13.9% in the first quarter of 2019.

Balance Sheet and Cash Flows

As of March 31, 2020, the Company had cash and cash equivalents of $107.5 million, an increase of $43.8 million from December 31, 2019, reflecting draws on select credit facilities, in part in connection with bolstering its cash position ahead of the impending economic downturn. Net debt increased from $609.1 million as of December 31, 2019 to $662.8 million as of March 31, 2020, mainly due to higher working capital and net leverage at the end of the first quarter was 2.49 times, compared to 2.28 times at the end of 2019.

The following table shows our current net debt position as of March 31, 2020 compared to December 31, 2019

Cash inflows from operating activities in the first quarter of 2020 amounted to $4.9 million, down $21 million year over year, due to an increase of net working capital of $38.4 million primarily driven by higher accounts receivables and inventory levels. Net working capital totaled $257.7 million as of March 31, 2020, compared to $221.1 million as of December 31, 2019.

Cash outflows from investing activities in the first quarter of 2020 amounted to $50.9 million, up approximately $27 million year over year, primarily driven by higher spending in connection with investments to comply with the settlement agreement with the U.S. EPA, which are subject to an indemnity claim against Evonik.

Cash inflows from financing activities in the first quarter of 2020 of $109.8 million reflect draws on various credit lines to bolster the liquidity of the Company in light of the current economic uncertainty. Cash outflows reflected scheduled debt repayments of $2.0 million and $12.0 million in dividend payments.

COVID-19 Summary

We are considered a critical industry by many governments and were able to sustain production at all our sites in the first quarter. We are currently operating numerous reactors in ‘agile campaign mode’ where we run for typically several weeks, restock inventories, and then shut down the reactors while continuing to ship. This mode minimizes costs while keeping us ready to support our customers as they gradually increase their production.

Our action plan encompasses an ongoing effort focused on protecting our employees and our production capability, supporting our customers, ensuring supply chain stability and enhancing our financial standing.

• Employees
  • Accelerated implementation of business continuity plan
  • Secured and distributed personal protective equipment early
  • Consulted with expert physicians
  • Work from home policy where possible
  • Highly effective physical distancing practices in plant locations
  • Temperature screening

• Production
  • Sustained ability to operate through pandemic
  • All plants open and shipping
  • Using down time productively
  • More than 75 percent of tire plants served by OEC were fully or partially idled in April; only a few specialty customers idled
  • OEC plants at about mid-40s percent utilization in April
  • Tire manufacturing plant restarts expected to occur slowly

• Financial Standing
  • Suspended dividend
  • Drew under revolver to bolster cash position
  • Continual stress testing of liquidity and financial covenants
  • Managing toward lower safety stock levels
  • More frequent evaluation of Watch List customers and suppliers; holding the line on A/R terms
  • Targeted cost actions with $10-15 million annualized impact

• Customers
  • Sustained reliable supply
  • Gained spot business based on reliability
  • Seamless transfer to remote customer service operations
  • Ongoing communications
  • Ability to deliver; managing transportation issues
  • Monitoring activity

• Supply Chain
  • Secured access to raw materials
  • Tight monitoring of consumables supply situation
  • Adapting sourcing strategies as needed
  • Implementing alternative shipping options as required
  • Monitoring governmental regulations

• Community / ESG
  • Personal protective equipment and cleaning equipment donations to health providers
  • Working with employees and unions to minimize layoffs
  • Enhanced benefits at impacted plants
  • Continued focus and momentum on ESG

Outlook

Mr. Painter continued, “Looking ahead, while it is impossible to know the ultimate dimensions of the economic impact of COVID-19, it’s important to remember that our markets are ultimately strong, perhaps even stronger now. We believe driving, in the controlled environment of a car, is going to be a very popular mode of transportation. New car sales may be slow at first, but replacement tires drive 60% of our rubber carbon black demand.

“We enter this downturn with a high performing global team that is committed to our future success. We have developed one of the strongest, most technologically diverse Carbon Black franchises in the world, a sound balance sheet, attractive debt maturity profile and substantial liquidity to withstand this economic downturn. We are confident in our ability and wherewithal to deliver through this downturn on behalf of our customers, our employees, the communities where we operate and the shareholders whom we serve,” concluded Mr. Painter.

Conference Call

As previously announced, Orion will hold a conference call tomorrow, Friday, May 8^th 2020, at 8:30 a.m. (EDT). The dial-in details for the live conference call are as follow:

A replay of the conference call may be accessed by phone at the following numbers through May 14^th, 2020:

Additionally, an archived webcast of the conference call will be available on the Investor Relations section of the Company’s website at: www.orioncarbons.com.

To learn more about Orion, visit the Company’s website at www.orioncarbons.com, where we regularly post information including notification of events, news, financial performance, investor presentations and webcasts, non-GAAP reconciliations, SEC filings and other information regarding our company, its businesses and the markets it serves.

About Orion Engineered Carbons

Orion is a worldwide supplier of Carbon Black. We produce a broad range of Carbon Blacks that include high-performance Specialty Gas Blacks, Acetylene Blacks, Furnace Blacks, Lamp Blacks, Thermal Blacks and other Carbon Blacks that tint, colorize and enhance the performance of polymers, plastics, paints and coatings, inks and toners, textile fibers, adhesives and sealants, tires, and mechanical rubber goods such as automotive belts and hoses. Orion runs 14 global production sites. The group has approximately 1,450 employees worldwide. For more information, please visit our website www.orioncarbons.com.

Forward Looking Statements

This document contains and refers to certain forward-looking statements with respect to our financial condition, results of operations and business, including those in the “COVID-19 Summary”, “Outlook” and “Quarterly Business Segment Results” sections above. These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among others, statements concerning the potential exposure to market risks, statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions and statements that are not limited to statements of historical or present facts or conditions. You should not place undue reliance on forward looking statements. Forward-looking statements are typically identified by words such as “anticipate,” “assume,” “assure,” “believe,” “confident,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “objectives,” “outlook,” “probably,” “project,” “will,” “seek,” “target” “to be,” and other words of similar meaning.

These forward-looking statements include, without limitation, statements about the following matters: • our strategies for (i) mitigating the impacts of the global outbreak of the coronavirus, (ii) strengthening our position in specialty carbon blacks and rubber carbon blacks, (iii) increasing our rubber carbon black margins and (iv) strengthening the competitiveness of our operations; • the ability to pay dividends at historical dividend levels or at all; • cash flow projections; • the installation of pollution control technology in our U.S. manufacturing facilities pursuant to the EPA consent decree; • the outcome of any in-progress, pending or possible litigation or regulatory proceedings; and • our expectation that the markets we serve will continue to grow.

All these forward-looking statements are based on estimates and assumptions that, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon any forward-looking statements. There are important factors that could cause actual results to differ materially from those contemplated by such forward-looking statements. These factors include, among others: • the effects of the COVID-19 pandemic on our business and results of operations; • negative or uncertain worldwide economic conditions;• volatility and cyclicality in the industries in which we operate; • operational risks inherent in chemicals manufacturing, including disruptions as a result of severe weather conditions and natural disasters; • our dependence on major customers and suppliers; • our ability to compete in the industries and markets in which we operate; • our ability to address changes in the nature of future transportation and mobility concepts which may impact our customers and our business; • our ability to develop new products and technologies successfully and the availability of substitutes for our products; • our ability to implement our business strategies; • volatility in the costs and availability of raw materials (including but not limited to any and all effects from restrictions imposed by the MARPOL convention and respective International Maritime Organization (IMO) regulations in particular to reduce sulfur oxides (SOx) emissions from ships) and energy; • our ability to respond to changes in feedstock prices and quality; • our ability to realize benefits from investments, joint ventures, acquisitions or alliances; • our ability to realize benefits from planned plant capacity expansions and site development projects and the potential delays to such expansions and projects; • information technology systems failures, network disruptions and breaches of data security; • our relationships with our workforce, including negotiations with labor unions, strikes and work stoppages; • our ability to recruit or retain key management and personnel; • our exposure to political or country risks inherent in doing business in some countries; • geopolitical events in the European Union, and in particular the ultimate future relations between the European Union and the United Kingdom resulting from the “Brexit” which may impact the Euro; • environmental, health and safety regulations, including nanomaterial and greenhouse gas emissions regulations, and the related costs of maintaining compliance and addressing liabilities; • possible future investigations and enforcement actions by governmental or supranational agencies; • our operations as a company in the chemical sector, including the related risks of leaks, fires and toxic releases; • market and regulatory changes that may affect our ability to sell or otherwise benefit from co-generated energy; • litigation or legal proceedings, including product liability and environmental claims; • our ability to protect our intellectual property rights and know-how; • our ability to generate the funds required to service our debt and finance our operations; • fluctuations in foreign currency exchange and interest rates; • the availability and efficiency of hedging; • changes in international and local economic conditions, including with regard to the Euro, dislocations in credit and capital markets and inflation or deflation; • potential impairments or write-offs of certain assets; • required increases in our pension fund contributions; • the adequacy of our insurance coverage; • changes in our jurisdictional earnings mix or in the tax laws or accepted interpretations of tax laws in those jurisdictions; • our indemnities to and from Evonik; • challenges to our decisions and assumptions in assessing and complying with our tax obligations; and • potential difficulty in obtaining or enforcing judgments or bringing actions against us in the United States.

You should not place undue reliance on forward-looking statements. We present certain financial measures that are not prepared in accordance with U.S. GAAP or the accounting standards of any other jurisdiction and may not be comparable to other similarly titled measures of other companies. These non-U.S. GAAP measures are Contribution Margin, Contribution Margin per Metric Ton, Adjusted EBITDA, Adjusted EPS, Net Working Capital and Capital Expenditures. Adjusted EBITDA, Adjusted EPS, Contribution Margins and Net Working Capital are not measures of performance under U.S. GAAP and should not be considered in isolation or construed as substitutes for net sales, consolidated profit (loss) for the period, operating result (EBIT), gross profit or other U.S. GAAP measures as an indicator of our operations in accordance with U.S. GAAP. For a reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP measures, see Appendix.

Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include those factors detailed under the captions “Note Regarding Forward-Looking Statements” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Note R.

Contacts

INVESTOR CONTACT:
Wendy Wilson

Investor Relations

+1 281-974-0155

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