All right, good morning, everyone. I'm Dan Rizzo, Jefferies Equity Research. Up next is Orion, and with us today is CEO Corning Painter. We're gonna have a fireside chat here. We're just going to, kind of go back and forth. If you do have questions you wanna kind of bring up, please just raise your hand, and we can try to weave you in. But to start, Corning, thank you for coming. And, so I guess we're hearing more caution on extended summer shutdowns and soft order books for the fall. I guess, what are you guys seeing?
Sure, well, let me first just say thank you for having us here, and thanks for everybody who's joining this session. Also, I am joined by Jeff Glajch, our CFO, and Chris Capps, who some of you might know from the research area before, who's now our head for Investor Relations. In terms of what we're seeing, I'd say if you look at publicly available data, if we want to think about rubber in particular, if you look at the latest data from the Fed, I think it's right down the center of the kind of guidance that we gave, so it shows a slight improvement from where it's been.
It's up a couple percentage from year-ago factors for July, but yet still down from 2023, 2022, 2021, even 2019, and that's kind of the mode that we're in, so, a little bit, recovered situation, but no way what we would deem, like, a strong mid-cycle kind of, economic activity right now.
There's been a lot of talk, obviously, about the ban of carbon black, rubber black coming out of Russia and Belarus. I guess, what are you seeing? Have you seen that take effect yet? I mean, has there been any tailwind from that, or is it still something that's, I guess, coming more, more-
Sure. Well, let me give a little context for everyone. So there was about the European market, let's start there, about 1.9 million kt, right, of tons of carbon black, excuse me, going in, of which Russia was about 600,000. If you threw in Belarus and Ukraine, you're maybe 750-780, that kind of range. So a little bit more than a third of the carbon black came from those countries. And then, the EU put in a ban beginning mid this year in June on Russian carbon black, so that was anticipated when the last contract cycle was being negotiated, contract cycle going January- to- January. And what happened more recently is that Belarus also got banned, and that's a positive for us. There's really one big manufacturer in Belarus. It's Omsk.
Omsk mainly makes product in Omsk in Russia. So if you had any concerns about country of origin confusion, that kind of thing, that's all moot. In terms of a big impact, because we do these annual or multi-year contracts, and they tend to run January forward from there, not a big impact for this year. We did see a few people looking around. We do sense it's obviously a real positive for us in 2025, and that's where we'll see it. I expect that to be just tightens up supply-demand balance in Europe. And maybe to go one step further, like, there's no capacity, like, underutilization between us and our competitors to make up for a third of the demand in Europe.
So that means there's imports from India, imports from China, and so I think another positive setup for next year is just all the shipping friction, the shipping costs, the unpredictability of what's happening in the international shipping market really puts a higher premium on having domestic production like we do.
So, I mean, shipping from India and China in normal times is very costly, and now with everything that's going on in the Middle East and what we've all read about-
Yeah
It's making it worse. So I guess that's raising, must be raising prices for the region across the board if that's, that's the only extra.
Exactly. So it has to come from there, and it's not just what's the cost at one moment of time, it's also just the volatility in that cost, right, has been pretty significant. And I think just yesterday or the day before, the CEO for Hapag-Lloyd made a comment to the effect of, "If you think our industry can handle the bullwhip effect of supply-demand shifts with this speed, we can't." And that makes sense, right? There-- it's big assets, and the whole issue of where are containers around the world, so I think all that puts just friction out there. Now, there's still going to have to be imports from those countries, but the question is the surety of supply and the cost that we're competing against. As those two factors grow, hey, that increases the premium that's available to you as a domestic producer.
With that in mind, given that you mentioned utilization, and there's no underutilization, what is capacity utilization in Europe, and how does it compare to, say, the U.S.?
Right. So let me answer it this way: Global, for us, I'd say, is mid-seventies, so way off what our maximum could be, and we're going to have our second-best year ever on EBITDA. We're gonna be, like, 3% off last year, right? So not a big move in that regard. So I just think an important point for us is, like, even in those conditions is there, it's huge dry powder for us, as that just normalizes an import trade flows of tires more than really even carbon black. That's a big upside for us and for the industry, I'd say, going forward.
So I don't know how much you can tell us about this, but given all that backdrop and the ongoing negotiations going on, is there anything you can tell us about rubber contract negotiations?
Right. So it's difficult to say a lot, right, when you're really in the middle of them because they're, commercially sensitive issues, but I would say the setup, I think, is very positive for this year. So we just talked about the EU situation with the ban on Russian and Belarusian carbon black. We have the issue of, supply chain disruption, unpredictability, cost, which plays out certainly in Europe, a little bit in North America. Sometimes buyers try to threaten... They used to threaten, "I'll buy from Russia." Okay, we'll see how that works. Now they can threaten they'll buy from other locations. We still have the restructuring of the industry, so, a good customer of ours, Hankook, they had a large facility that burned in Korea. they're not rebuilding it.
They announced the way they're gonna address that capacity is through Clarksville here in the U.S. and an expansion in Europe. So we still have this fundamental restructuring of more capacity going into those areas, and really, in North America, I mean, other than some de-bottlenecking, pretty much zilch in the way of carbon black capacity additions, and in Europe, really very, very limited, especially in comparison to what's been banned. So I think all those things are a really positive setup for us in the coming year.
Given what you just said, I mean, what are the reinvestment economics to build new capacity in the U.S.? A nd Europe? I mean, is it, I mean, just given the EPA and everything else, is it even feasible or?
I don't think it's attractive, and I think that's why we don't see people doing it. In my view, if you're really gonna go for reinvestment, let's say, in rubber carbon black in these areas, let's say North America. Well, just as we did EPA in North America, and by the way, we're complete, and not everyone is, Ontario, Canada, right? They're requiring those same requirements. That's going to play out on. We don't have production there, but other people do. And we can wonder, and, you know, I think the EU continues to push back and push back, so we're really not talking about an EU program till 2029 or 2030. But hey, it's still there as an overhang, in the industry space.
In my view, if someone was really gonna do it, you would need a really serious commitment from the tire customer, right? Not just on that one plant, on your whole capacity picture in the region, and you'd need to get a pretty high return on an IRR. And, where that would have to be would go a little bit on what's the risk factor they give. I really am very skeptical we're going to see those conditions met.
But that would actually go more towards the take-or-pay aspect of this business that we've kind of been talking about for a few years now. But that would have to actually come to--
I mean, if you did that, I think it's more easy to see your way to production.
Right.
Right? In the absence of that, with all the risk factor in the current model, I don't think it's very attractive, and, I mean, you just don't see people do it. We did one expansion in Italy, mainly at initially for specialty. Okay, thanks to what's happened there, we do more rubber with it. A competitor announced three expansions, one in Europe, one in India, one in China. The European one was, I think, 40 kt brownfield expansion at an existing site. That's against over 700 kt-
Yeah
Has been taken out of the market. So I think just empirically, you could see that, you know, rational players all making their independent decisions. It doesn't seem to me like other people see that differently.
In just focusing on the U.S. and some of the supply and the demand dynamics there, we're just getting a lot of questions about tire producers maybe using low-carbon inputs from methane pyrolysis. Do you see that? I mean, what kind of threat is that? O r opportunity, maybe an opportunity, or how should we think about it?
Sure. So the background here for people, we're talking about Monolith. So this is a start-up company. They're in Nebraska. They have some capacity today, 21, 22-ish. They got a loan guarantee for over $1 billion from the U.S. government to do an expansion. To my knowledge, they have not broken ground on that to this day. It would make carbon black, but hydrogen, right? So this has really morphed into a hydrogen story. We know those credits end in 2031, and they haven't broken ground. So I think, there's been a publication recently from one tire guy saying it's potentially feasible to use this raw material, but it's quite different from saying it's gonna happen. But going back to your point about capacity, and is some idiot going to add capacity?
In my opinion, like, okay, here's another overhang, you know, that, that's a detriment or a pushback from any desire to add rubber carbon black capacity in North America. I don't think that's going to happen today or tomorrow, and I don't believe they've broken ground. So I think that's, let's say, net, on net, I think a positive for the industry in terms of having an overhang and discouraging overinvestment.
Okay, and then with specialty black, I mean, it's a little bit of a different animal because I think there is the return on in investment there is probably a little bit better. But can you just talk to us about what the cost of a new capacity is for a greenfield this time?
Right. So, I mean, in specialty, it really depends upon what you're making. So we're doing acetylene- based technology for lithium-ion batteries, wire and cable applications like that in La Porte right now. That's quite different from other specialty. What I would say in general, for Orion, look, we don't need to add capacity. All right? We've, we've got this facility that we're still working on loading in Huaibei. We've probably got, even without it, 20 kt- 30 kt overall in specialty. We got, like, approaching 140, 150 in rubber. We'll have the La Porte for the high-end connectivity space. So if we look forward a couple of years, I just don't see the need to really think about what investment is requirements are.
We needed to make the investment in La Porte to be meaningful in the lithium-ion battery space or the iron battery space, the sodium ion, any of those different technologies need our stuff. But now that we have it or will soon have it, I just, I think we're in a position where we don't have to allocate capital in that direction. We've got the capacity. We can grow into it for a few years, and that will all be good, and it, it sets up the ability then to do more of, like, for example, we're in the buyback space right now. We could look at debt. We, you know, it gives us flexibility what we do with that cash flow.
You mentioned carbon conductivity. I was just wondering if your outlook for that market has changed, just given the volatility we've seen in the last yeah with EV?
There's no question about it, right? The outlook for EV is a little bit less, but it's really come down much closer to what our range was, and so we expect maybe 4000 GWs by the end of this decade, and we're okay with that. The really premium material in this space is carbon nanotubes, CNTs. We chose not to go there and not do an acquisition in that space. We're doing more of this technology we bought in France, then upgraded for lithium-ion batteries. I think it gives us a much better price point. We'll also be the only people making this stuff in North America or in Europe, which I think the way the world economy is going right now, is a real positive for us.
So, the main impact for us, I would say, is if everything was going gangbusters, and all these things were starting up, and battery factories at the same time, we'd probably get qualified more quickly 'cause people would be like, hand- to- mouth, "I need the material." I think in the current environment, okay, we're gonna have to go through more like a normal qualification period for it. But I think all in all, given the size of our plant and the distinguishing nature of acetylene-based material, and there's not many people who make it, and its price point relative to CNTs, I think all of that puts us in a good position from cost value in that space.
So CNTs, the nanotubes, that's-- You said you're kinda shying away from that. Is there something about that market just makes it less-- Is it too competitive?
So if you were gonna look at graphs of what you're going to put into the cathode or the anode, if you could imagine on both of the y-axis, one is going to be how much, let's say, a carbon particle like we make, and the other one is going to be how much you're going to use on CNT, you can imagine the two curves going down, and the more you use of our material, just the less cost there is in it. CNTs just cost a lot more. There's a zillion other trade-offs. CNTs are a little bit dirtier in terms of metal because they bring some of the catalyst along with them. They are slightly better in connectivity than what we have. We're better on moisture.
There's all these trade-offs that the guy making the battery is go think about in their trade-offs. But I would say, as we look at that market right now, we see that curve moving in our direction meaning more of the kind of lower cost, good connectivity, high quality, high purity material that we make.
Okay, and by the way, if there's any questions, please raise your hand. Yeah. Okay, here we go.
Quick, quick one.
Let's get the mic for you.
Quick one. On tires, kind of end market demand, you mentioned specialty before. That's been a bit of a weaker market the last kind of six, 12 months. Are you seeing kind of any improvement there? Or can you just give us maybe some comments on what you're seeing in terms of end market demand?
Sure. So I think one thing to think about specialty for us is we have a number of different production technologies, and we really price according to the value we produce. But what that means is the profitability of different grades is quite different, right? As well as our difficulty in manufacturing and everything else. So the big thing for us in GP per ton is always going to be mix, and it's really hard to overstate that, and just how wide the range of profitabilities are for us. So for example, bringing on La Porte could move that up, maybe even $100, right? So, like, things can move that mix pretty significantly. If we think about the overall industrial conditions, I think if you think about North America, Europe, and Asia, largely China, like, it goes to general manufacturing in those areas.
So, maybe like, if you look at PMI right now for general manufacturing, it's really not very encouraging in any of those markets. Brazil is maybe the most positive, I'd say, at the particular moment. That's a challenge in it, but at the same time, if you see our volumes, they have been generally improving. Our GP per ton was down a little bit in the second quarter from the first, but we said, "Look, we think for the full year, it'll be more in the $650-$700," which will be bringing it back up from that range. And of course, that's gonna depend a little bit on where mix is. I'd say that's overall an improving situation. This is all consistent with the guidance that we gave.
And you could look at PMI, you could look at industrial production, that kind of thing, to get an interquarter update.
All right, thanks. And then just to kind of get to one kind of small sticky point, just with the unauthorized transfer can you just kind of discuss the issue in, I guess, specifically, is there any chance for insurance recoveries on that?
What I've said to all investors is expect a $60 million loss before tax impact, okay? And is there a chance for some insurance cover? Yes. Is that something we need to work through? Yeah. But I would still say in magnitude, is that will we be able to recover some of it? Yeah, maybe. But I would still say in magnitude, I think we all need to be prepared for that. It's embarrassing, and it's bad. It pisses me off. It should have never happened. We trained for this so much, including pretty much this exact situation. I mean, to the extent when this went down, like our GC said to me, "Corning, is this like another drill?
Is this real?" A board director when I called him, 'cause we've done this with the board as well to be prepared: "Corning, is this a drill?" "No," like, this was real, and it just shows no matter how much you prepare. And what we've shared with this is senior person in our financial organization, went for the kind of fraud that was like CEO, CFO. "Oh, I got a really special mission for you." And the person's role involved transferring large sums of money around anyway for us. And I think that's kind of where we went. So then we have a big investigation with that, with law enforcement on not one, not two, but three continents, as well as the board running one with external help for them as well.
So that's still underway, which limits a little bit what I could say. But yeah, deeply disappointing. So again, I think we should just all expect, in magnitude, $60 million before tax implications, and I would expect it to be tax deductible, you know, an expense.
Okay, and then just getting back to the business side, I just kind of want to focus on free cash flow for a little bit. So you mentioned, the capacity utilization, both in specialty and rubber black is probably right where you want it to be. There's no need for expansion there. The EPA thing is, I shouldn't call it a thing, but the EPA, payments is just about done. So that would suggest that we're now kind of shifting towards a lot more free cash flow. I assume that's for shareholders, but is there opportunities out there for M&A or?
Sure. So let me first of all clarify, while our current loading is okay, right? It's a good year for us. We would like to load that space, and we see the ability to ultimately load up the additional capacity. So I wouldn't say we're happy with it, right? We'd like to see the economy going stronger, our customers doing better, and we see a big upside in just loading out that capacity from where it is. But my point is, we don't really need to invest in growth to be able to do that. We got that capacity more or less in place as we wrap up 2025 . So what that means is, next year we would expect to see just our capital spending down, let's say, $20 million-$30 million, the following year, down another $50 million-$60 million.
And even if EBITDA stayed steady, which is not our plan, right? Our plan would be to move up price, capture some more volume, all of that as the economy moves. All that we see is just additional free cash flow from where we are right now, without the need to do a lot in growth, meaning that we expect to continue maintenance around where we are. We'd have some improvement capital, so we've shown that, I think, in like $20million-$30 million. So like still nonetheless, that roughly $80 million-$90 million dollars of less capital. We're currently in a share purchase program. We see this opportunistically. We think it's an attractive place. We could definitely do more than that.
We could obviously do more with the dividend, but I think in the current situation, we give more value to our shareholders in that. We also have the ability to just absorb some of that cash and move down our debt a little bit from where we are. If you think about last year, right, we did share purchases, we reduced debt, and at the same time, yeah, well, we returned capital to shareholders as the purchases.
So not a lot of adjacencies or anything like that in terms of-
In terms of M&A? So look, I am a big disbeliever in transformative M&A. I am big disbeliever, really, in really large M&A. What we have done since I've been here is we bought a plant in France, that basically has destroyed acetylene for LyondellBasell, and then we were able to upgrade that. Like, we tripled the lab space at that facility in getting ourselves qualified in lithium-ion batteries. A technology play like that, that's like really close to our core, I think we'd be open to, but those are not huge dollars. Typically, those are not, you know, like transformative sort of events. We had certainly opportunities to buy, for example, CNT companies. They all carried a big premium, we didn't do that.
You mentioned that the technology that you bought in France, but I was just wondering if you think about, like, technological opportunities, if you look at, like, say, tire recycling. I mean, how do you see that? How can Orion benefit? Is there an opportunity there? The size of it, just any details you can give?
Sure. So customers are very interested in a circular economy for tires. If I want to get a meeting or Pedro Riveros wants to get a meeting, like with a big executive at a tire company, you just need to put that on the agenda, and they'll take your meeting. There's very keen interest. If you look at the industry documents, it's on their collective roadmap of what they want to do. It's also not easy. Most used tires today are burned in a cement kiln, so all that carbon is going to be released, and it's sold really like sub-fuel value. So our goal, and we did this originally in BlackCycle, so it was a Michelin-funded EU, EU-funded, Michelin-led effort. We made carbon black from the oil you can get from, pyrolyzing a tire.
We've separately made in a small investment in a company in Europe that makes that. It's basically just a way for us to be a player in that and ensure we get the raw materials that we need to drive those grades. I see that as an opportunity for us. The vast majority of our R&D spending in the rubber space is really around circular economy aspects. So I think that's a big opportunity for us. We would look to be in a position to share more on that when we do our investor day next year, and I think it's an area where it's not just blue-sky thinking. I mean, customers would buy it. It's going to have to be not too huge a premium from where we are, but I think there's strong demand from customers for that.
That's one of the things, if you think back to that question about tire or methane pyrolysis, where you can do that all you want to make hydrogen, but you're not gonna recycle a single tire doing it. I think that's ultimately like there's a lot of space for what we're working on.
And a quick follow-up, just because we're talking about, kind of circularity in tires. The regulation changes in Europe in terms of EUDR or in terms of the kind of tire particulate matter is that gonna have implications for what products you sell into your customers?
So I don't think carbon black is going ti be like headline in the question of-- well, the question is about tire wear particles, so that gets a little bit more attention in some parts of the world, and there's concerns about some of the materials that's in the rubber. To date, we're not one of those materials. What I would say is, if you want your tire to last longer and generate fewer particles per kilometer or mile, you would use more carbon black and less silica. So it's like there's maybe a slight upside for us in that. I'd say if you're really thinking about that, think about EVs weigh a lot more, they got better acceleration. Like, that's a much bigger factor, I think, that we're going to see in terms of driving demand, for rubber.
But I don't think the tire wear particle issue is gonna be that significant for our part of the industry.
So we covered EVs, the carbon opportunity for carbon conductivity and then recyclable tires. Are there any other potential opportunities for sustainability that could be benefit to Orion?
Sure. We would look at the conductivity story as playing into that. One element is EVs and electrification of transportation, and all of that, but actually, we can use these same particles, the same product that we make in, for example, high voltage electric cables. If you think about a high- voltage cable, it's alternating current, so the magnetic field is shifting around. They want right next to that wire, a semiconductive rubber layer, and if they get that in there, it's going to reduce electromagnetic radiation from the wire, and that's less energy loss over a long cabling distance. Number one, they need more cable for remote wind. Like, we got a plant out in West Texas, there's a lot of windmills there, not a lot of people there, right? You got to get that over to Dallas or Houston, something like that.
You have the whole issue of offshore, like Grid 2.0. All of that means more wire, and then this material is a way you can have lower energy losses in transmission, and still have it holding up. So in other words, when we use acetylene, right, made from a gas, just two carbons, there isn't metal coming along for the ride in that, you get a really pure grade, to my point, the distinguishment with carbon nanotubes as well, and that's really, something those guys value a lot. So, I'd say sustainability driven in terms of enabling wind, enabling solar, distributed power, all of that, but, in the end, demand for us in the same way a, a battery would be. I'd say batteries are another one. There's all this talk about, you know, EVs, and it's what we mainly think about.
But, you know, there was an article this week, I think, in The Economist, about grid storage batteries and, people thinking more about that. Pretty much all these technologies require a carbon black, a conductive carbon in there.
All right, I think we're just ab out out of time, unless there's any last questions from the audience. I wanna thank everybody for listening in, and Corning and the team-