Orion Engineered Carbons S.A. (NYSE: OEC), a worldwide supplier of Specialty and High-Performance Carbon Black, today announced third quarter 2019 financial results.

Third Quarter 2019 Highlights

• Net sales of $370.2 million compared to $394.0 million in the third quarter of 2018
• Net Income of $24.3 million and basic EPS of $0.40 compared to $25.8 million and $0.43 in third quarter of 2018
• Adjusted EPS¹ of $0.52 compared to $0.55 in third quarter of 2018
• Net cash provided by operating activities increased by $68.5 million during third quarter of 2019 to $142.7 million for the first nine months of 2019 compared to $64.5 million for the first nine months of 2018
• Total Carbon Black volumes of 256.4 kmt compared to 266.7 kmt in third quarter of 2018
• Adjusted EBITDA¹ of $68.1 million compared to $72.6 million in the third quarter of 2018
• Specialty Carbon Black Adjusted EBITDA of $30.0 million and Rubber Carbon Black Adjusted EBITDA of $38.1 million in the third quarter of 2019

¹⁾See below for a reconciliation of non-GAAP financial measures to the most directly comparable US-GAAP measures

“In the third quarter we executed well despite weakness in Asian markets and with automotive OEMs. Other key markets have weakened as the year played out along with the broader economy. This impacted our Specialty segment and Mechanical Rubber Goods (“MRG”) business while tire remained stable. Nonetheless, by remaining firmly focused on areas within our control, we achieved strong cash generation, realized Rubber segment price increases, and implemented a leaner and more efficient management structure. Furthermore, our operating performance generated more than enough cash to fully fund our dividend while supporting our capital expenditure program. We will emerge from this slowdown stronger, and better positioned competitively, to take advantage of our future growth opportunities,” said Mr. Corning Painter, Chief Executive Officer.

Mr. Painter continued, “Overall, price and mix were very positive for us this quarter and nearly off-set the downside from lower volumes and feedstock differentials. Pricing gains were concentrated in Rubber, while volumes were softer in Specialty and MRG. In the fourth quarter we expect differentials to stabilize at roughly current levels, while we expect volumes to remain on trend, but to slow around the December holidays as we have seen in the past.

Looking forward to 2020, while it is difficult to predict the direction of the world economy, we are sure that tires will continue to wear out and drive replacement demand. As this represents the majority of our Rubber black segment demand we continue to expect a strong 2020 pricing cycle and stable volumes for this business. We will implement a feedstock differential pass-through mechanism in our contract business which will significantly reduce variability associated with differentials in our P&L. In Specialty and Rubber we will remain disciplined in our pricing management, not chasing volumes. Instead, we plan to advance our new product offerings, get paid for value, and de-bottleneck high value offerings.

Finally, we are rounding out our strong management team with the addition of our new CFO, Lorin Crenshaw, who brings a wealth of public company experience and broad chemical sector expertise to our team. We look forward to our next chapter of growth under his financial oversight and leadership. We wish current CFO Charles Herlinger well for his retirement and thank him sincerely for his service and leadership.

I look forward to our opportunities in the fourth quarter and the year ahead. We will stay laser-focused on driving strong operational and financial performance in the business environment that develops, while also positioning our company for future success,” concluded Mr. Painter.

Third Quarter 2019 Overview

Overall volumes decreased by 3.9%, or 10.3 kmt, to 256.4 kmt compared to the same quarter in the prior year. The decline was principally due to continued economic weakness related to the automobile industry in China and Europe, which impacted especially our Specialty segment and MRG business while tire remained stable.

Net sales decreased by $23.8 million, or 6.0%, to $370.2 million versus the same quarter in the prior year primarily as a result of lower volumes, the pass through of lower feedstock costs to customers and negative foreign exchange translation effects, offset by positive base price increases and improved mix.

Contribution Margin decreased by $7.6 million, or 5.3%, to $135.4 million compared to the same quarter in the prior year despite base price increases in Rubber. The decrease reflects lower volumes, negative feedstock differentials, foreign exchange rate translation effects and lower energy sales.

Income from operations decreased by $3.4 million, or 8.3%, to $38.4 million from the same quarter in the prior year. This decrease is mainly driven by the decrease in Contribution Margin somewhat offset by lower selling, general and administrative cost.

Adjusted EBITDA decreased by $4.5 million, or 6.2%, to $68.1 million compared the same quarter in the prior year, reflecting the decrease in Contribution Margin partially offset by lower selling, general and administrative expenses as well as some positive foreign exchange translation effects associated with fixed costs.

Net Income in the third quarter of 2019 decreased by $1.5 million to $24.3 million compared to the same quarter in the prior year reflecting primarily the decrease in Adjusted EBITDA offset by a lower tax expense.

Quarterly Business Segment Results

Volumes for the Specialty Carbon Black business decreased by 6.7% in the third quarter of 2019 from 64.7 kmt in the third quarter of 2018, as a result of weaker automotive market demand mainly in Asia and Europe and weaker economy in all regions.

Net sales decreased 8.4% to $122.8 million in the third quarter of 2019 as compared to the third quarter of 2018, mainly due to lower volumes, lower feedstock cost pass through to customers and negative foreign exchange rate translation effects, partially offset by base price increases and improved mix.

Gross profit decreased by $6.8 million, or 14.2% to $41.4 million in the third quarter of 2019 as compared to the third quarter of 2018, due to lower volumes, negative foreign exchange rate translation effects, higher fixed manufacturing costs and lower energy sales, partially offset by improved mix.

Specialty Adjusted EBITDA decreased by $4.7 million, or 13.6%, to $30.0 million in the third quarter of 2019 compared to the third quarter of 2018, reflecting the decrease in gross profit partially offset by lower selling, general and administrative expenses. The Adjusted EBITDA margin decreased 140 basis points to 24.4%.

Rubber Carbon Black volumes decreased by 6.0 kmt, or 2.9% from the third quarter of 2018 to the third quarter of 2019 primarily due to lower automotive mechanical rubber demand in China and Europe, with replacement tire demand remaining stable.

Net sales decreased by $12.4 million, or 4.8% to 247.4 million in the third quarter of 2019 as compared to the third quarter of 2018, primarily due the pass through of lower feedstock costs to customers, lower volumes and negative foreign exchange rate translation effects offset by base price increases.

Gross profit decreased by $3.6 million, or 5.9%, to $57.3 million in the third quarter of 2019 as compared to the third quarter of 2018, as a result of higher negative feedstock differentials, lower volumes, lower energy sales and negative foreign exchange rate translation effects offset by base price increases.

Rubber Adjusted EBITDA increased by $0.2 million, or 0.6%, to $38.1 million, in the third quarter of 2019 compared to the third quarter of 2018, reflecting the decrease in gross profit offset by lower selling, general and administrative expenses. Adjusted EBITDA margin was 15.4% in the third quarter of 2019 compared to 14.6% in the third quarter of 2018.

Balance Sheet and Cash Flows

As of September 30, 2019, the Company had cash and cash equivalents of $56.0 million, a decrease of $1.0 million from December 31, 2018. Net Debt decreased significantly to $616.4 million from $635.5 million at year ended December 31, 2018 reflecting strong cash generation in the third quarter of 2019. The Net Debt represents a multiple of 2.30 times LTM Adjusted EBITDA, compared to 2.16 times at the year ended December 31, 2018.

The following table shows our current net debt position as of September 30, 2019 compared to December 31, 2018:

Capitalized transaction costs as well as non-current debt from financial derivatives and other non-current liabilities are disregarded in computing net indebtedness under our lending agreements.

Cash inflows from operating activities in the third quarter of 2019 amounted to $68.5 million, consisting in particular of a consolidated profit for the period of $24.3 million, adjusted for depreciation and amortization of $22.0 million with other impacts mostly offsetting each other. Net working capital totaled $270.9 million as of September 30, 2019, compared to $282.9 million as of December 31, 2018. Net Working Capital at the end of the third quarter of 2019 ended at 68 days.

Cash outflows from investing activities in the third quarter of 2019 amounted to $34.5 million reflecting capital expenditure for improvements in the manufacturing network and the Specialty expansion in Ravenna, Italy as well as investments in order to comply with the settlement agreement with the US EPA, which is subject to an indemnity claim against Evonik Degussa GmbH (”Evonik”).

Cash outflows from financing activities for the third quarter of 2019 amounted to $29.5 million and included repayment of borrowings, the quarterly dividend payment, regular interest and debt payments.

2019 Outlook

“While economic conditions are challenging, our business remains robust and we have taken appropriate cost and pricing actions to deal with this environment. As a result, we expect to end the year within our guidance range. We are narrowing our guidance range for the full year 2019 Adjusted EBITDA to $265 to $275 million, from our previous guidance range of $265 to $285 million. Other areas of guidance for 2019 remain unchanged except that we now expect our non-EPA capital expenditures to about $80 million, and our US EPA settlement related capex to be in the range of $50 to $55 million before any indemnity payment by Evonik to us for this expenditure, with our group overall tax rate for the year at 29% rather than 30%,” said Mr. Painter. “We are pleased with our performance in this environment and we will continue to manage our cash and capital spending closely in order to optimize cash generation. In line with our current milestone planning, with just five more quarters of elevated EPA capex before it falls to around a $20 million per year range, we are confident in our ability to manage through the duration of the spend while maintaining capital efficiency. This requires trade-offs in the near term, but in the current economic conditions these are prudent decisions, while allowing us to comfortably address our dividend in the interim and position us well for growth as the macro economic environment improves,” Mr. Painter concluded.

Source: Orion Engineered Carbons

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