Good. All right. Thanks, everyone, for joining again. Josh Spector, UBS, North America Chemicals and Packaging analyst. Today, I'll be joined by Orion Engineered Carbons' Corning Painter, Orion's CEO on the stage with me, and then we have Jeff Glajch, the CFO, and Chris Kapsch, IR, in the audience as well here, in case needed. I think before we get started, just a disclaimer, as a research analyst, I need to disclose the nature of myself and UBS about any firm we express a view on the call today. Those are available at www.ubs.com/disclosures, or reach out to me, and we can get those to you.
So I think the first place we'll start here, first, I'll say thanks, Corning, for joining, and ask Corning to give a really quick overview of just Orion, who you are, business mix, kinda key drivers, set the stage.
Sure. So first of all, thanks, Josh, for the opportunity to be here, for everyone who's listening in or here in the meeting room today. So Orion makes carbon black. It's an essential material. It goes largely into the rubber industry. So think about tires, think about belts, hose, that kind of thing, and also into a variety of specialty markets. We're overweighted in specialty. Think here about kinda anything man-made that's black, whether that's a synthetic fiber, a coating, ink, engineered plastics. Look at your phone, look at your dashboard, we're kinda everywhere. The big themes for us is, number one, cash flow. So cash flow has been tight, in part because we only recently really moved up the pricing significantly in this space two years ago, and we had a lot of spending prior to that in EPA.
Right now, we're closing out our really big growth investment in terms of La Porte, Texas, which will qualify us into the lithium-ion battery and wire and cable market. So that would be one. As our capital spending comes down, we look out to 2026, probably, $80-$90 million. Even if EBITDA just stays constant, we just keep up with cost inflation, it would still free up a significant amount of free cash flow for us in that time frame. Secondary thing, and what really helped us to move the pricing, is just restructuring this industry, which is to say, people building tire factories in North America and in Europe, and really no carbon black expansion to speak of, particularly in the US. And in Europe, the ban of imported carbon black from Russia and Belarus really tightens up those markets.
So there's a quick summary for you, Josh.
Hit on a lot there. So we'll, we'll break that apart piece by piece here. So first, I kinda wanna talk about the earnings power.
Yep.
So you guys had an investor day a couple of years ago-
Yep.
talked about $500 million
Yep
- in EBITDA power, but obviously wasn't as explicit target by a date, but more of a mid-cycle thinking. I guess today we're sitting at less than 350.
Yep.
I guess if you can, one, talk about your level of confidence-
Yep
- in that earnings power, has anything changed? And then, two, talk about the path for you to get there.
Sure. Well, so, you used the fresh expression, earnings power. We put it as earnings capacity, and we have a goal to have that capacity in place by twenty twenty-five, and we'll do it. So, for that to happen, to make that forward statement, we, number one, would say we've got about 140 KT of rubber carbon black out there, capacity available to us. So that's about $60 million-$70 million of EBITDA potential for Orion right there. In a mid-cycle economy, we would expect to sell that all out, because, again, there's been expansions of the tire capacity in North America and Europe, not so in rubber carbon black. Next up, on specialty, we'd say we have 20 to 30 KT, meaning kilotons, of capacity available.
It's more profitable, so that would be worth about $20-$30 million of EBITDA. We have a new facility in Huaibei, in China, the Anhui Province, so that would be worth about $20 million of EBITDA to get that loaded. We then say we have the potential, I'd say, pretty comfortably, for another $15-$20 million of EBITDA just from price, efficiency, mix. Mix is a big thing for us, especially in specialty, where different end markets, we're able to add more value, therefore, we're able to get a little bit more value for it. And then the final closure of that, in terms of capacity, would be bringing on the La Porte plant. That's due to come on in the second half of next year.
To be clear, it is not gonna be sold out and loaded by the end of next year. So in terms of earning capacity, we see that we're gonna have that in place. However, especially for the more difficult qualifications, the higher margin applications there, that's gonna take longer to get a qual. I'd say, generally speaking, the more differentiated the sale, the more profitable the business, the more challenging the qual is. And that will go into lithium-ion batteries and other advanced battery technology, as well as wire and cable. So think of like Grid 2.0, connecting up, you know, remote wind, offshore wind, those sort of applications. And that's our pathway. So as I said before, a forward-looking statement, we're highly confident we're gonna get there, and that's the roadmap to do it.
And really, we just need to finish off our work in La Porte, and we don't really have to spend additional capital beyond that in a big way to make that all happen.
So maybe to put the 140 KT of rubber-
Mm-hmm
in some scale
Yep
... how does that compare to your current capacity?
Yeah.
I guess, do you grow into that over many years? Is there a share gain? How do you reach that full earnings capacity?
Sure. So we're operating right now in low to mid-seventies in terms of capacity. So think about that. We're gonna have our second highest EBITDA ever. We're gonna be 3%-ish off last year's EBITDA... with that kind of loading. So that's just like massive upside for us. And, like, we'd be way above our original guidance for this year if we just had rubber carbon black coming in the way we expected it for this year. So what's impacted that? Well, actually, tire sales are pretty good in North America, especially passenger car tire sales, but tire imports have been up, right? So that reflects people responding to inflation, trading down, right? If you bought a top-tier tire, move down a grade, move down a grade. Pretty soon, you're buying an imported tire.
I think that's been a big part of what's impacted this year for us. If we look at the most recent import data, it does show it's slowing. If you look at the most recent data from the Federal Reserve in terms of U.S. tire manufacturing, right, which has lagged tire sales, tire sales were back to, like, 2019 last quarter, tire manufacturing well below it. But nonetheless, we've seen that tick up a bit. So I think, like, there, we're really looking for that market to recover. When we talk to customers, which is for us, like, supply chain guys, manufacturing guys, they would say, "Look, we need to make the value proposition in our marketing department," right? A tire with a mileage guarantee is actually a lower cost of ownership tire than an inexpensive import with perhaps no guarantee.
The other thing they would say is, "Look, if we're, like, produce, we can make a 60,000-mile tire or whatever. But if the market no longer wants that, and people are looking more at cost today versus savings tomorrow, maybe we need to make more 30,000-mile tires." So I think a lot of that is with the tire industry to kind of have the value proposition and communicate it, as well as there's some speculation. So some tire manufacturers thought the step up in imports, right, which impacted all of us, ourselves as well, was a little bit driven by people getting ahead of, let's say, anticipated tariffs. I don't see the EU or the North American governments surrounding their automotive industry, so we may see more in that space as well.
To get us back to that 140, I mean, 2018, 2019 kind of volumes would be absolutely fine for us. Current, like, passenger cars tire sales isn't that far off of it. Miles driven is really quite attractive. We just need, on the passenger side, just sort of getting back to previous import levels, which are always there, right? We don't make enough tires in the United States. We don't make the smaller tires, so it's not like this needs to go to zero. It's just sort of getting back to norm. And then the other part of it is truck, bus, and so forth. That's probably about 45% of the rubber carbon black goes to that market. And there, you're really looking at, like, manufacturing activity drives trucking more than anything.
If you were gonna look at FreightWaves data, you'd see that came down. For everybody listening, I'm sorry that I'd be motioning with my hands, but you can imagine a curve that trended down and started trending up, but then it sort of stalled on the recovery. I think when we see the trucking industry coming back, reflecting, let's say, just general manufacturing activity, those are the things would do it. When that's gonna happen? As soon as possible would be my view, and that's not just waiting for something to happen in terms of the economy or in terms of tariffs or government responses, but I think also just like in the value proposition of the domestic manufacturers in North America, in Europe, I think that's a good opportunity for these guys to bring it back.
So we see that as, yeah, quite doable.
Yeah, that's a helpful answer. I'd probably talk more about the segments in a little bit.
Okay.
I probably wanna go back up a little bit and think about capital allocation-
Okay.
-for cash flow, because to your point, it's probably the most important piece.
Yeah.
-of, I think, what's going on right now. So, you know, from my view, there's already been an inflection-
Yeah
-in [OEC's] CapEx spending, gone from environmental to, to growth. And that environmental side has now come down. But, you know, when you go back a couple of years ago, you know, you made a decision, we're gonna immediately invest that in the La Porte facility. I guess when you look at that now, has anything changed? And also just thinking about the environment on EVs-
Yeah
... from that perspective, or is the outlook there as you-
Right
... still expected that? Basically, meaning, do we expect the same earnings profile to-
Mm-hmm
to pick up from here?
Sure.
Anything we should be discussing differently?
So in our Investor Day in twenty twenty-two, we laid out, we saw two growth opportunities for Orion, both related to sustainability. In the tire area, all about circular economy, making carbon black from tires. We've done that. We've participated in a Michelin-led, EU-funded program. We now have our own EU funding to continue work in that direction. Not a big capital requirement for us. The other commitment we made at that time was we were gonna go for it with conductivity, specifically for batteries, wire, and cable. Think lithium-ion, but actually, people want to work with sulfur, iron, different things. Like, there's an application there for us. And so we've built the plant to do that. We had bought a plant in twenty eighteen that made conductive carbon from acetylene.
It was really aimed at lower-end applications like batteries in a flashlight. We tripled the lab space in that facility. We really upgraded it. We got qualified both by wire and cable companies, as well as by lithium-ion battery manufacturers. We're working with the same raw material supplier. In Texas, we're building a new facility, largely the same production technology and so forth. So we still feel good about that. If we were in a super hot market, right, maybe we would get qualified more quickly, because if they're like hand to mouth, although it's normally a one-and-a-half-year qual process, oh, I'll be very hurried. I think we're gonna see, like, the normal qualification process play out in this. We never had one of these super high growth programs.
Kind of our middle-range number of what our expected case was is, I think, pretty common what people would see today, in terms of 20-30 sort of gigawatt hours. Like, the premium product, and other people invested in this with CNTs, our material is often the both our material and CNTs would be used in a battery, a conductive particle, like what we make. Our price point is a lot less than CNTs. I think the way this market is moving is just sort of pushing customer demand into our direction. We're also a very clean product. We're not quite as conductive, in fairness, as CNTs, but you put it all together, I think it's a good place for us. I think we'll get ourselves qualified. We've also had success in wire and cable with it.
So do I wish the market was super hot right now? Well, of course, and the qual would be easier, but, I think we will get that loaded, and we still expect to earn that, the margin. So we've said we'd get about $40 million-$45 million of EBITDA out of that investment. That's still absolutely our target for it.
Should we think about that facility having a baseload customer? Any visibility around, you could say, "Hey, the pricing is where we thought it would be. The demand is gonna be where we thought it would be." Any context there?
So, I worked with, previously supplying into the semiconductor industry for years. For products like this, even though you've got one factory that supplies it, now you've got a new one, you're gonna have to get qualified. I would also not say a baseline. So if we look at what we do in the French plant, we want to supply as many different players as we can. The more people we get to qualify this material, the better it's gonna set us up for loading the new facility in La Porte. Good prospects for us, I would say, initially, they're mainly gonna be in Asia. That's where we sell most of the carbon black or the acetylene black from France into. But we'd be looking for people who then wanna build a facility in the United States or Europe.
That's not too hard to figure out, you know, who they are from their public announcements. We get qualified, "Hey, we're now the local supplier," I think, in the way many things are going in the world, having local supply. We will be the only. There's only three companies who really may do much with acetylene in terms of making these conductive carbons. We will be the only people manufacturing in North America. We are the only people doing this in Europe. So I think as those facilities come, like, that's a real plus with it. That said, in the current environment, right, it would probably be more of a market in Asia, day one, but I think it really sets us up for that transition.
Okay. And then, I guess when you think-
Well, when you're planning on baseload. So I'm not really gaming for one baseload, right? I think playing the field is an attractive approach.
Okay. So moving past the La Porte facility, I guess, what do you think about next from here? Because I think generally, I mean, the market was somewhat surprised initially about the growth spending.
Mm-hmm.
You talked a bit more about growth spending a couple of quarters ago. That's now kind of dialed back, and I think the challenge here is that, you know, at five times this EBITDA-
Yeah
... you're not being valued as a growth company.
Right.
So how do you weigh showing better free cash flow, cash return, versus some of these, albeit very attractive, growth investments?
Right.
How do you marry those two?
Yeah, so I think pretty straightforward. Right now, we don't really have the need to invest a lot more in growth, right? We got 140 KT we just talked about in rubber carbon black, 20-30 in specialty. Yeah, the high end of specialty, where it's super differentiated product, where I supply you, you spend, like, a couple of years qualifying it, putting little paint chips out in Florida to check them. All right, we have to expand that to keep up with your ramp. It's not huge money. It's a good business. We'll do that, but we just don't need to invest a lot. We might, down the road, do more in conductive carbons.
Yeah, a lot's happened in the world of batteries, so we can pace how quickly do we load, and when do we think is the right time to move forward and with what in the battery space? So we would look at, if you think about next year, probably $30 million less in capital spend, and the capital we would spend would be the maintenance, which we've stepped up, and we think we'll get a return on the incremental investment we're making in maintenance. And then really completing the plant in La Porte next year, starting it up in the second half, and then a little bit of additional growth CapEx, for example, those super differentiated grades in the specialty area that require some extra hand-holding.
If we go forward from there, though, into the next year, like, the combined reduction in capital would be maybe $80-90 million. That is not huge in the scale of the world, I get it, but in the scale of this company, like, that kind of free cash flow improvement is big, and that's just saying everything else stays flat, right? We sell some of that additional capacity, we continue to move the price north, we continue to improve the mix in our business. Like, that's all... You know, it'd have to be after tax, not just EBITDA, but in terms of cash for us, yeah, that's all a step forward for us moving forward.
So I mean, we see it from my perspective, and ultimately, there's a board involved in how we would allocate some of this, but in my personal view, we don't really need to do a lot more in growth in that space. We've got what we need. Number two, I think at the current share price, purchasing is a lot better way to reward shareholders than doing a increasing the dividend or something like that at the current prices. And I've never been a big believer in acquisitions. The only acquisition we ever did in my time here is we bought that plant, basically for the cost of the plant, that used to destroy acetylene for LyondellBasell, who is our supplier in France and who will be our supplier in La Porte, Texas.
And so there, we are kind of buying the technology and the plant and the know-how, which, of course, then we upgraded, as I said, to get ourselves into the top-end batteries. So, I mean, that really leaves space in that area. And we talk about this internally. I think you should make your employees, every one of them, as financially literate as possible. And we talk about, hey, we could do buybacks, we could reduce debt, we could invest for growth. So debt, really, the best way to move that ratio down is to grow EBITDA, right? And we think we've got a pathway to do it. Okay, let's talk about growth. So for $18 million, you can buy 1 million shares of Orion. You're gonna boost EPS with, like, no risk by like 1.7%.
Like, wow, what's the growth investment any company has for $18 million to move their EPS like that? Yeah, there isn't. So we just need to be honest, like, as employees, everybody's interested in growth, but hey, we can use some of that project fixation skill into our maintenance area instead. We can do that productively. We can gain capacity as we step up the maintenance levels. But for right now, at the current share price, I'd say that's a very attractive prospect position for us.
So when do you get comfortable thinking about buybacks more? So what leverage level? I guess, obviously, cash flow is going to be a factor there-
Sure.
but how do you manage that over the next 18 months when CapEx-
Right
is still a little bit more elevated?
So we're, we announced in the last quarter that we're in a, a share purchase environment right now for Orion. In a way, we're sort of looking to the future because we're going to have, you know, very tight cash flow this year. Nonetheless, we think it's the right thing for us to do to kind of look forward one year. We're going to be measured in this, right? We're not going to, like, put our balance sheet at risk or the company at risk. So, you know, we've got the chance to potentially step up modestly from where we are now next year and do more as we get into twenty twenty-six. So, you know, we've always taken a balanced approach to this, and I think people should expect us to continue to do that.
Okay. I think one thing to wrap up cash, I mean, I do need to ask about the controls issue.
Yeah
that you had earlier. I don't know if there's any update you can give about-
Sure
If there's any potential of recovery on that and just your view about how tightly closed that issue is now?
I would say that issue is extremely tightly closed, well understood. I'd also say you could do all the training in the world. You could train on this specific thing. You can make people take training every single month. You can phish every employee every single month, but holy shit, like, somebody could still do this. And that's what's happened to us, and it's a big drag on... We talk a lot about cash as a company and cash application, how we're going to invest it, to use our cash flows. I was just saying, I think it's just a huge blow to all of us here. There's a lot better things we could have done with $60 million. But I think investors should anticipate and should expect that, you know, before tax, we're going to have a $60 million loss on this.
We're working on a recovery, and there is some insurance and all that, but I think we should all just expect it to be about a $60 million increase, basically, in our debt level before tax. I do think it'll be tax deductible. We'll have to go through, you know, the auditors and all of that, but I believe it'll play out in that way, and you know, so at this point we continue the investigation, criminal investigation across multiple continents, internal investigations. The ultimate controls that we'll be changing as a result of this, you can imagine the audit committee and the full board are very involved in this. We've got outside consultants in it as well.
We really need to let that process run before we can say more about "What are we changing specifically around that?" We obviously have clamped down very tight on those controls. I think we'll move to a slightly more balanced position as we get that advice.
Okay. No, I appreciate the transparency there. So shifting gears and kind of thinking more about the segments-
Mm-hmm.
and I guess still slightly more at a high level.
Mm-hmm.
I think when some investors look at your stock and look at the earnings profile, you'd say, well, earnings moved up.
Mm-hmm.
Every or many other companies saw earnings step back down because there was a period of overearning. I have my view. I'd be curious on your view about why you'd say this level of earnings or higher level of earnings, particularly in rubber black.
Mm.
is sustainable.
Mm-hmm
- for OEC.
Yeah.
What did you do to get here, the industry?
Yeah.
What's kind of the next-
Yeah
- leg from here?
Yeah. So I don't think anybody who looks at this should think we're overearning at all, right? We are entitled to get a return on capital. Everybody's entitled to a return on their capital. When I came into this industry, when I listened to competitor calls and our own calls before I joined, I heard a lot about margin. I didn't hear much about capital. That was one of the first things I changed when I came in. I remember this one guy, he was a very aggressive guy, still works with us in the sales team of the tire industry. He's like, "Well, you know, we won the last couple of years. Maybe it's their turn to win this year." I was like, "No, you're wrong. We didn't win. We're below our cost of capital. You've lost. We're continuing to lose.
Don't take it personally, but, like, this is crazy! Like, this is not the way to run an industry for the long haul, and we all have to invest in the air emission controls in North America. We, by the way, are done with all four plants. Not everybody is, with their smaller number of plants. We don't have any plants in Canada, but Canada has woken up to this, and so two of our competitors have to upgrade plants now in Canada. People have to invest that. We've talked about the step-up we're doing in maintenance. Hey, your return, you can get a return on your capital you put into maintenance. That's fair, so I think, like, the big thing here is that. The second thing is, hey, supply and demand, so people are onshoring capacity.
One of our customers in Asia, they had a factory burn recently. Very unfortunate for us. We're a supplier to them. You know, their stated thing is we are not rebuilding in this country. We're rebuilding or we're expanding further in Clarksville. I shouldn't say. They're rebuilding in the U.S., and they're expanding their position in Europe. They had a position in each place already. So, I mean, you see that. You can look at all kinds of announcements of people onshoring capacity into those two areas. People who had maybe a big facility in Russia that they've walked away from, they want to rebuild now into Europe. So that's, I think, a really positive thing, just long-term sentiment for it.
We also have in Europe. Well, they used to get their carbon black. Well, over a third of the carbon black from Russia, Belarus, and Ukraine. So Russia and Belarus are now banned by the EU. Ukraine is a sad story that needs to get replaced. There is not enough between us and our competitors, like, to make up a third of that market. So now those imports have to come in from India or from China. But think about it, right? So shipping costs are higher. We had, I think, Hapag-Lloyd just a couple of days talking about if you think this can be smooth and we can adjust to the bullwhip effect in the supply chain, you're wrong, right? This is gonna be volatile. Costs are up quite a bit now. Even as they come back down in the negotiating period, I don't care, right?
We all know it's gonna be volatile, and if you wanna think about China, so China has a different raw material going into carbon black. It's coal-based, meaning not coal-fired power plants, coal gasification, but like coke oven gas, so related to steel. So I think there's a chairman of Baowu recently talked about, hey, all the challenges for the Chinese steel market. We can see all these challenges they have about people complaining about imports and all that. To the extent China steel slows down, and think about real estate in China right now, to extent that steps down is gonna make this byproduct raw material more expensive.
And that's gonna do two things: number one, it's gonna make China carbon black simply less competitive, and number two, if you're a tire buyer or a tire manufacturer, if you lock into that supply chain, then your input cost is just detached from everybody else, 'cause everybody else is more related to petroleum. So, you know, if things move out of kilter, right, you're exposed to risk there. So I think that's another factor, right? That affects like a premium we're entitled to, to being native in Europe. And, you know, that's a premium against the other guy's price, and the other guy's price is gonna have to move with higher shipping costs, right? That's what the delivery cost is gonna look like. So I think you put those things together, you look at right now, maybe decreasing imports, a little bit improvement in manufacturing.
That's another thing that would tighten up the markets. Another element is, yeah, it's a little softer, not super high loaded right now. At our current loading, right, low to mid-seventies, we're gonna have our second-best year ever of EBITDA. We're gonna only be, like, 3% off. So, like, I'm not desperate in this market. And, you know, it's, it's clearly an area where we can move up from, if we think about it that way. So I think, you know, if that's this year, we're not negotiating for next this year, we're negotiating for 2025. I think there's some positive trends there. If manufacturing picks up, right, that'll pick up more truck tires. So, I think all those things are, are there. I guess some of the answers I gave you are specific to 2025.
Maybe another way to answer it is just numerical. We've raised price, I think, every year since at least twenty eighteen. GP per ton has gone up every year since twenty eighteen, except for twenty twenty, right? Fixed cost absorption, but every year it's moved up. The big step up was not last year, it was two years ago, and we took another step up this year. Like, this is just a supply and demand restructuring, as well as, like, if you're gonna invest, you got to get a return on capital, and we're entitled to that price, and that sure as hell isn't over-earning, right? That's what you need to be, like, in this business long haul.
Yeah-
I'm sorry. I'm passionate on the topic of pricing.
No problem. I think, so I mean, just to frame it then, so, I mean, returns seem like for the industry, they're at a healthy level, but we're not at the point where it's gonna attract... I guess the risk is that it gets too healthy and it attracts more capital. I guess there's two things to ask on there.
Right.
There's one, I mean, the industry is semi-consolidated when you think about Europe-
Yeah
... and North America, so some of that's maybe more visible and more disciplined. But how do you avoid basically attracting-
Right
... new capital to here? And even if you did have the money, could you actually build more of these plants in other regions?
Right. I mean, you need the raw material, which would be one thing, with the changing in the world economies and less coal, like, that's one thing. Number two, I mean, nobody's announced in North America. In Europe, the only things are, we brought on a plant in Ravenna, another reactor line for, like, 20-30 KT. That came on stream just. It was really aimed at specialty, but it came on just after the invasion. So what do you know? We flipped it all to rubber. That loaded in one month, and one competitor has announced 40 KT, and that's against, again, just Russia alone, about 600 KT that went into Europe, and that's it. And nobody's announced rubber carbon black capacity in North America. And just the cost to do it, I'd say, is very high.
In North America, you have Monolith, the group trying to do methane pyrolysis, a way to make hydrogen. You'd also get carbon black. We could talk more about that if you want. It's been delayed multiple years, but nonetheless, there it is, an overhang. So, like, what idiot wants to build with that, you know, hanging around? And in Europe, you have open questions about, well, what if there's peace, this and that? Well, the worst that happens, it reverts to the old business model. But I think that's just a discouragement for investment there. And I think tire guys would really have to change the business model, long-term commitments to get people really motivated in this marketplace. So for right now, I see little risk of that. And, you know, a greenfield site, permitting, be probably two to three years anyway.
Fair enough. And I guess just on the Russia point, so I mean, with the bans-
Mm-hmm.
I mean, corollary situation in fertilizers, where there were bans, and then it kind of quickly came back. This is different in terms of what's banned and how structural it potentially is. But I mean, what's your view about the industry being able to rebalance to this in a year or so, and then things normalize?
Mm-hmm
... versus structurally-
Yeah
... change the cost structure?
Yeah. So I would point out, when we made a significant step change in the profitability, we achieved more in North America than in Europe, more in North America than in Europe. So this whole thing of Russia has nothing to do with what happened in North America or in South America. And yep, it does include a little bit what happened in Europe, but you know, that was gonna tighten one way or the other, regardless. So I think it's different from those other ones. You've seen the staying power of it thus far. And I'm not sure if I'm answering your question directly on it, Josh, but I think it's unlikely to be able to reverse. You've just got, amongst other things, maybe there wasn't an expansion in cropland, but there's definitely an expansion in tire manufacturing.
And so, like, that product, you can't make it without carbon black. It's got to come from somewhere. And yep, so right now, in the current environment, it comes from India and China, and so we price against that in terms of their input costs and their transportation costs. But nonetheless, right, it's just a growing demand in the region.
Yeah. No, I think that makes sense. I think the shipping piece is also just another-
Another point of-
-factor of what that does to reprice.
It's two things. I mean, one thing is the cost and the cost variability. The next thing is, like, there's a lot of blank sailings in this world. Blank sailings is when the boat was booked, and then the boat isn't gonna sail. So you gotta find your way on another boat. When you talk to people who work in that supply chain, like, it's miserable. It's really hard. And you shut down a factory or a factory line, as a procurement person, you are not popular, right? That's, like, the biggest... There are a lot of fixed costs in these big factories. So I think it's both the cost, it's the unpredictability of it, and it's frankly, just the reliability and the headache, versus you're buying from someone, you know, who's on the ground where you are.
You know, there's a value there we deliver, and it's only fair we are able to capture some of that value that we deliver by being in the region and having continued to invest in maintenance and everything else in these regions, air emission controls combined.
Okay. And I mean, we talked about it earlier around the imports in the U.S. environment-
Mm-hmm.
but I wanna kind of hit it one more time, slightly more detail.
Yeah.
Just from the perspective of, are we actually-- So we've seen imports start to come down-
Mm-hmm.
-but structurally, are you seeing enough either innovation of the tire companies to maybe change their mix or controls around imports to get the domestic tire production up?
Right.
Is that a declining risk, same level, anything moving there?
I think that they have seen this before and have had to change their value proposition slightly in terms of what mix of tires they're making, and to run the advertising and communicate to the marketplace the value of their products. Again, when we talk to tire manufacturers, they mainly, while they may be frustrated with their marketing department, the guys we talk to, I think they're confident, "Hey, this is something we can do." But regardless of that, say, soft comment, if you just look at the most recent Fed data, right, probably the most rapid data you can get is Federal Reserve on tire production in North America or in the US, and, you know, it's up, like, 2.5%, I'd say, from last year.
Okay, it's down from twenty-two, it's down from twenty-one, so there's room where they can go with that, but that's a positive, and that's also absorbing the fact that truck traffic isn't what it once was, right? And that's gonna come back as it naturally... No one's gonna incent that. That's gonna come back as it, as it comes back with the general economy. So I mean, like, I think tariffs and all that, that's an upside. I don't think a business strategy should be based on government action or hope, government action. So, like, there's things they can do to make that happen, and I think they, I think they're on that case.
Okay.
I, you know, I think empirically, you do see the volume is up, so that's a step in the right direction.
Okay. I think the last thing on the rubber side is just the contract negotiations.
Mm-hmm.
I don't know if there's any latest update you can give there.
Right.
You talked about the approach being different-
Mm.
Maybe starting a little bit earlier. So where are we now?
Yeah. So first of all, there's a limit to what I could say because we're in the middle of it, and it's all sort of commercially sensitive. We did share our first earnings release that, wow, you know, some people were out already. We indicated that that was great, but we weren't in a hurry to close. We shared that we had sort of been left at the altar last year by someone who drug out these negotiations, and in the end, didn't want as much as they had sort of hinted they were gonna want or indicated they wanted, and we were gonna take a different approach. We're not, like, having a really prolonged negotiation.
In the Q2 release, we said, "Yep, you know, that didn't actually come to a head." Just like we promised, we had a negotiation. We had a time limit on it. We didn't get it done, we closed that. We, of course, are open to, you know, reengaging with those people as we move forward in it. That's more our approach this time. We think that's gonna work out well for us. We think, you know, it'll be another successful year. I don't wanna talk about specifics. I don't think that's maybe appropriate, but I will just say it one more time, right? So you got the long-term restructuring of this industry. So a little soft in 2024, who cares, right? We're negotiating for 2025. You got all the trade friction out there. You got the difficulties in shipping.
You've got the potential for a rebound in rubber from the trucking volumes recovering for us. You've got the full ban of Russia. So there's probably still maybe 200, a little more than 200 KT of Russian carbon black coming into Europe this year. That's maybe not gonna go to zero. Is there gonna be any cheating? But it's gonna be less than 50. You got Belarus taken out now. Those are all positives for us. You have this question over China's steel. Like, that's all public data. That's all out there you can look at. I think those things are by and large, really positive trends for us.
All right. That makes sense. I think we talked initially overweight specialty, and that's very little about that.
Mm-hmm.
So for the last few minutes, just talking about that side of the business... I think the debate's been a lot less around the earnings power and everything going on there. But what do you need really to get the volumes in that business going again?
Sure. So the volumes have improved for us, right? We are gonna do better than we expected this year in specialty. What we need is just a broader base manufacturing rebound. When volumes are low in specialty, I think it's a huge mistake, especially in the premium grades, to chase volume with price. You're just destroying value, and their volume isn't there to be had. A lot of times in the premiums, you may be sole source. They've spent all these years qualifying you. That's really not the issue. The issue is just what's there and demand. So for the most part in that area, we need that. We have some areas where we've got some raw material costs that have pressured us in this whole time frame.
Improving on some of the raw material costs as we work through this is another opportunity for us. We've got a variety of levers there. I think, you know, this year is gonna be a rebound over last year. This year is gonna be better than we initially thought, and we just sort of need to keep that going. Specifically to the volume, that goes a lot towards the demand. Keep in mind also, we have shifted some volume, like I mentioned, Ravenna Line Four, from specialty into rubber, and we will always put, let's say, the that one zone of specialty and rubber, like, compete for reactor time. That's just part of how we create some pricing pressure in our marketplace.
And how about the mix element of it? I know it always moves around-
Mm-hmm.
-but, I mean, coatings and maybe some-
Yeah
Battery materials are higher mix.
Yep.
Where is that today, and-
Right
And is that a lever that also can be a step-up factor?
So for anyone who follows us, our GP. First, I always follow GP per ton versus, like, margin of sales, 'cause we pass through energy costs to our customers effectively. So energy prices go up, it looks like margins went down, but it's not really true. Second thing I'd say, if you look at specialty, it's always gonna be chunky or bouncy because we price to the value we create. We do some very special things for some of the high-end specialty grades. So when those go, we've created more value, we make more profit than some of the more, less differentiated grades. So coatings in general, we shared last quarter, was actually pretty good for us in terms of volumes, but automotive, especially automotive top coat, wasn't as strong, right?
It was more happy homeowner, you know, go to a Home Depot, that kind of thing, go to our marine protective coatings. These sort of things were strong. They're still better than our average, but they're not as great as, let's say, some of the more premium areas in that space. In this area, really, it's a long-term thing we do to drive it. So we opened up a lab in North America several years ago, working with customers on the qualifications. These can take years for those grades to get it in, and then continuing the debottlenecking. So, like, that's where we spend that extra $20 million-$30 million. Some customers spent all these years. They put the paint chips out in Florida for years to see if they're gonna fade.
They're ready to rock and roll, and a competitor started ramping before them, and you don't have capacity after they did all that work? That's not very good, right? That's not the supplier we're gonna be. So we continue to work at just debottlenecking, making sure we can support our customers' growth. They can put us into a new formulation with confidence, right? And we're gonna have the product there for them. I'd say that's the other thing that's important for, like, driving the mix. When we bring on the new acetylene plant, right, that will be very additive to our mix. Yep, it's gonna take some while to qualify it, but, you know, wire and cable, lithium- ion batteries, other advanced batteries, we add a lot of value there. So again, we're able to get our share of that value.
That sounds good, and I think with that, we're up on time. So I wanna thank Corning, Jeff, Chris, everyone at OEC for joining us today and everyone that's joined us in the room and online.
All right. Thank you all very much.
Thank you.
Thanks, Josh.