Orion Engineered Carbons S.A. Announces Third Quarter 2017 Financial Results

Orion Engineered Carbons S.A. Announces Third Quarter 2017 Financial Results

Third Quarter 2017 Highlights

• Revenue in the third quarter of 2017 increased to €285.1 million compared to €259.7 million in the third quarter of 2016 due to higher feedstock costs pass-throughs to customers, together with base price increases in both business segments and strong Specialty growth
• Specialty volumes increased 11.4% to 66.6 kmt underlying the continued success of the growth strategy of this segment, while Rubber volumes decreased by 5.1% to 206.3 kmt due to the Ambès, France plant closure 2016, the ongoing conversion of capacity in South Korea, as well as the impact of hurricane Harvey. Overall volumes decreased by 1.5% to 272.9 kmt compared to 277.1 kmt in the third quarter of 2016
• Profit (Net Income) increased to €13.0 million compared to €3.8 million loss in the third quarter of 2016 with the prior year being impacted by one-time closing costs of our Ambès, France plant
• Adjusted EBITDA ¹ decreased by 1.7%, or €0.9 million to €54.5 million compared to €55.4 million in the prior year third quarter due in part to the volume decrease resulting from the impact of hurricane Harvey, an unfavorable feedstock mix and negative foreign exchange translation impacts
• EPS was €0.22 compared to €(0.06) in the third quarter of 2016
• Adjusted EPS ¹ increased to €0.34 in the current quarter from €0.33 in the third quarter of 2016
• Specialty Carbon Black Adjusted EBITDA increased by 3.2% to €34.3 million in the third quarter of 2017 compared to €33.2 million in the prior year third quarter
• Rubber Carbon Black Adjusted EBITDA decreased by €2.0 million, or 9.1%, from €22.2 million in the third quarter of last year to €20.2 million
• Solid cash flow from operating activities totaled €35.9 million for the third quarter
• Effective around November 7, 2017, the Company’s Term Loan B debt will be repriced and its maturity extended for 3 additional years to July 2024. The margin on the Euro portion of this debt will be reduced from 2.75% to 2.5%, to a level consistent with the USD portion

^{1) See below for a reconciliation of non-IFRS financial measures to the most directly comparable IFRS measures}

Orion Engineered Carbons S.A. (“Orion” or the “Company”) (NYSE: OEC), a worldwide supplier of specialty and high-performance carbon black, today announced results for its third quarter of 2017. “Our two carbon black businesses performed well this quarter even in the face of the Gulf Coast storm and some currency headwinds. Our specialty business continued to grow, further penetrating regional markets and expanding its global market share, registering yet another double-digit volume gain in the period. For our rubber business, the quarter was highlighted by a double digit volume gain in China, although our overall volume declined, as expected, due to the closure of our French facility in late 2016, the ongoing conversion of capacity in South Korea from more common rubber grades to specialties and technical Rubber grades, and the impact of hurricane Harvey on our operations as well as those of our customers. Our Adjusted EBITDA remained healthy, coming in at €54.5 million, with the gain in specialty, not offsetting the drop in rubber, reflecting the negative impacts previously mentioned, some FX headwinds with the strengthening of the euro and an unfavorable feedstock mix in the quarter,” said Jack Clem, Orion’s Chief Executive Officer.

“Our cash flow remained robust as both the balance sheet and operating expenses were managed well. In addition, after the close of the third quarter, we successfully refinanced our debt,” continued Mr. Clem. “Despite a working capital headwind caused by higher oil prices in the quarter, cash flow from operations totaled €36 million, sufficient to fund our ongoing capex needs, cover our strong dividend and pay our interest expenses.”

Third Quarter 2017 Overview

Volumes decreased by 4.2 kmt resulting in total volume of 272.9 kmt in the third quarter of 2017 compared to 277.1 kmt in the third quarter of 2016. This 1.5% decrease reflected stronger volumes in the Specialty Carbon Black business, offset by lower Rubber Carbon Black volumes in part as a result of the closure of our manufacturing facility in France, the impact of hurricane Harvey and the ongoing conversion of capacity in South Korea.

While volumes in the quarter declined, revenue increased by €25.4 million, or 9.8%, to €285.1 million in the third quarter of 2017 from €259.7 million in the third quarter of 2016, reflecting mainly the pass through of higher feedstock costs to customers with agreements that link price to the cost of feedstock, price increases in the segments, strong growth in the higher priced specialty segment, offset by negative foreign exchange rate translation impacts.

Contribution Margin decreased by €3.7 million, or 3.1%, to €112.2 million in the third quarter of 2017 from €115.9 million in the third quarter of 2016, reflecting the impact of an unfavorable feedstock mix in Rubber and foreign exchange translation effects partially offset by the increase in Specialty Carbon Black volumes.

Gross Profit decreased by €1.9 million to €80.9 million in the third quarter 2017 from €82.8 million in the third quarter of 2016, consistent with the development of the Contribution Margin, offset by positive foreign exchange translation effects on fixed costs.

Adjusted EBITDA decreased by €0.9 million to €54.5 million in the third quarter of 2017, or 1.7%, from €55.4 million in the third quarter of 2016, consistent with the development in Gross Profit offset by positive foreign exchange rate translation effects relating to below margin fixed costs.

Quarterly Business Results

Volumes for the Specialty Carbon Black business increased by 11.4% to 66.6 kmt in the third quarter of 2017 from 59.7 kmt in the third quarter of 2016, mainly as a result of strong growth in Europe and North America as well as the expansion of sales of Specialty products from our facility in Qingdao, China. The Specialty business continues to benefit from increased global demand and further penetration of markets, with all regions showing strength.

Revenue of the business increased by €11.8 million, or 12.4%, to €106.5 million in the third quarter of 2017 from €94.7 million in the third quarter of 2016, which reflects the higher volume growth and base price increases, offset in part by a negative foreign exchange translation impact and regionally related product mix.

Gross Profit increased by €0.9 million, or 2.1%, to €44.3 million in the third quarter of 2017 from €43.4 million in the third quarter of 2016, reflecting the higher volume growth partially offset by a delay in recovering the impact of rising feedstock costs and a negative foreign exchange rate translation impact.

Adjusted EBITDA increased by 3.2% to €34.3 million in the third quarter of 2017 from €33.2 million in the third quarter of 2016, reflecting the development of Gross Profit and below margin costs. Adjusted EBITDA margin was 32.2% in the third quarter of 2017 compared to 35.1% in the third quarter of 2016.

Rubber industry demand remained strong during the quarter but as a result of the closure of our manufacturing facility in France, the impact of hurricane Harvey and the ongoing conversion of capacity in South Korea, our volumes declined by 5.1% to 206.3 kmt in the third quarter of 2017 from 217.3 kmt in the third quarter of 2016.

Revenue increased by €13.6 million, or 8.3%, to €178.6 million in the third quarter of 2017 from €165.0 million in the third quarter of 2016, as a result of the pass through of higher feedstock costs to customers on indexed price agreements, base price increases which offset the decline in volumes and negative foreign exchange rate translation effects.

Gross profit decreased by €2.8 million, or 7.1%, to €36.5 million in the third quarter of 2017 from €39.3 million in the third quarter of 2016, as a result of an unfavorable feedstock mix, lower volumes partly related to hurricane Harvey and some negative foreign exchange rate translation impacts.

Adjusted EBITDA decreased by €2.0 million, or 9.1% to €20.2 million in the third quarter of 2017 from €22.2 million in the third quarter of 2016, in line with gross profit offset by decreased below margin costs associated with positive foreign exchange rate translation impacts on below margin fixed costs, positive effects on costs as a result of closing the Ambès France facility and an ongoing focus on managing expenses. Adjusted EBITDA margin was 11.3% in the third quarter of 2017 compared to 13.4% in the third quarter of 2016 reflecting the impact of the pass through of higher feedstock costs on revenues as well as the Adjusted EBITDA development.

Balance Sheet and Cash Flow

The Company’s non-current indebtedness as of September 30, 2017 was €571.3 million composed of the non-current portion of term loan liabilities of €561.0 million (€569.1 million gross term loan liabilities reduced by capitalized transaction costs of €8.1 million), plus local non-current bank loans of €7.7 million and €2.6 million non-current debt from financial derivatives.

Cash and cash equivalents amounted to €55.8 million, and less €7.0 million current portion of term loan liabilities, comprise our net cash of €48.8 million.

Accordingly, net indebtedness was €528.0 million comprising non-current indebtedness excluding capitalized transaction costs and excluding non-current debt from financial derivatives (both of which are disregarded in computing net debt under our lending agreements), less net cash.

This represents a 2.32 times LTM Adjusted EBITDA multiple down from 2.37 times in the previous quarter and down from 2.50 times at the end of 2016. Cash inflows from operating activities in the third quarter of 2017 amounted to €35.9 million, primarily consisting of a consolidated profit for the period of €13.0 million, adjusted for depreciation and amortization of €20.4 million and the exclusion of finance costs, net of €8.4 million affecting net income. Net working capital increased as a result of higher oil prices and totaled €204.1 million as of September 30, 2017 as compared to €181.9 million as of December 31, 2016.

Cash outflows from investing activities in the third quarter of 2017 amounted to €17.2 million composed of capital expenditures for improvements primarily in the manufacturing network throughout the production system.

Cash outflows for financing activities in the third quarter of 2017 amounted to €10.6 million, consisting of a dividend payment of €10.0 million, regular interest payments of €6.4 million and regular debt repayment of €1.7 million, offset by net cash inflows from other financing activities.

2017 Full Year Outlook

“Both of our business segments have executed well in spite of the challenges presented by currency headwinds and the impact of a very serious storm in the U.S. which caused us property damage, serious delays and cancelled orders. We are expecting to recover some of the negative hurricane Harvey impacts in the fourth quarter of this year as the related supply issues and the logistic problems of the third quarter appear to be behind us now. Demand remains stable to good in our regions, particularly in Europe and a recovering South America,” stated Mr. Clem.

“We have been maintaining our Adjusted EBITDA guidance range through the year while keeping a close watch on key external developments in our markets, most notably oil price volatility and currency fluctuations which if they had remained at expected levels would position us at the midpoint of guidance. While underlying performance remains consistent with previous expectations, currency effects have moved negatively since our last guidance and are now expected to impact our full year projections versus initial guidance by approximately €4 million. Taking this into account and considering that we are otherwise performing consistent with expectations, we are tightening our outlook for full year Adjusted EBITDA to between €225 million and €230 million for 2017, with a mid-point assumption based on stable volumes and the current headwinds in oil prices and exchange rates. We see achieving the high end of this guidance range if the above assumptions hold and our Rubber business is able to make up the majority of the ground lost associated directly and indirectly with hurricane Harvey.”

“We are pleased with the execution of our two business segments during this past year and most recently while facing the challenges of the Gulf Coast Storm. Furthermore, we see mostly positive signs regarding supply/demand dynamics as we move into 2018. Improving economies are pushing up demand, new tire building capacity is coming online in our key regions, while carbon black supply remains constrained. Our consolidation project in South Korea will start to be an upside for the business in 2018 much as we have seen play out with our consolidation project in Europe. We have been encouraged by the positive developments in negotiations for the 2018 contracts with our major rubber customers. These began somewhat earlier than normal this year and are close to being finalized. Our specialty segment is planning yet another strong year of above market growth based on our strategy of penetrating regional markets while expanding our portfolio of advanced and premium products. And with our new debt package, we are well positioned to support the needs of our business.”

Other guidance metrics for 2017, also mostly unchanged, include shares outstanding of 59.3 million, an underlying tax rate of about 35% on pre-tax income, and capital expenditures reflecting an operating run rate consistent with the past of approximately €60 million but depending on the timing of certain expenditures potentially rising to approximately €75 million due to the expenditures associated with the consolidation of our plants in South Korea. Depreciation is estimated to be approximately €60 million, and amortization is estimated to be approximately €20 million (including amortization of acquired intangibles of about €13 million) in 2017.

Conference Call

As previously announced, Orion will hold a conference call tomorrow, Friday, November 3, 2017, 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 November 10, 2017:

The webcast can be accessed on the Investor Relations section of the company’s website at: www.orioncarbons.com. An archived recording will be available there following the webcast.

To learn more about Orion, visit the company’s website at www.orioncarbons.com. Orion uses its website as a channel of distribution for material Company information. Financial and other material information regarding Orion is routinely posted on the Company’s website and is readily accessible.

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, 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 and four Applied Technology Centers. The group has approximately 1,463 employees worldwide. For more information visit our website www.orioncarbons.com.

Forward Looking Statements

This document contains certain forward-looking statements with respect to our financial condition, results of operations and business, including those in the “2017 Full Year Outlook” and “Quarterly Business Results” sections above. These statements constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. 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. Some of these statements can be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “could,” “should,” “may,” “plan,” “project,” “predict” and similar expressions. 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 20-F for the year ended December 31, 2016 and in Note 10 to our audited consolidated financial statements regarding contingent liabilities, including litigation. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement - including those in the “2017 Full Year Outlook” section above - as a result of new information, future events or other information, other than as required by applicable law.

Reconciliation of Non-IFRS Financial Measures

In this release we refer to Adjusted EBITDA, Contribution Margin and Adjusted EPS, which are financial measures that have not been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) or the accounting standards of any other jurisdiction and may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is defined as operating result (EBIT) before depreciation and amortization, adjusted for acquisition related expenses, restructuring expenses, consulting fees related to group strategy, share of profit or loss of joint venture and certain other items. Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital because it excludes the effects of certain items that have less bearing on the performance of our underlying core business. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Some of these limitations are: (a) although Adjusted EBITDA excludes the impact of depreciation and amortization, the assets being depreciated and amortized may have to be replaced in the future and thus the cost of replacing assets or acquiring new assets, which will affect our operating results over time, is not reflected; (b) Adjusted EBITDA does not reflect interest or certain other costs that we will continue to incur over time and will adversely affect our profit or loss, which is the ultimate measure of our financial performance and (c) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other IFRS-based financial performance measures, such as consolidated profit or loss for the period.

Contribution Margin is calculated by subtracting variable costs (such as raw materials, packaging, utilities and distribution costs) from our revenue. We believe that Contribution Margin and Contribution Margin per Metric Ton are useful because we see these measures as indicating the portion of revenue that is not consumed by such variable costs and therefore contributes to the coverage of all other costs and profits.

Adjusted EPS is defined as profit or loss for the period adjusted for acquisition related expenses, restructuring expenses, consulting fees related to group strategy, certain other items (such as amortization expenses related to intangible assets acquired from our predecessor and foreign currency revaluation impacts) and assumed taxes, divided by the weighted number of shares outstanding. Adjusted EPS provides guidance with respect to our underlying business performance without regard to the effects of (a) foreign currency fluctuations, (b) the amortization of intangible assets which other companies may record as goodwill having an indefinite lifetime and thus no amortization and (c) our start-up and initial public offering costs. Other companies may use a similarly titled financial measure that is calculated differently from the way we calculate Adjusted EPS.

The following tables present a reconciliation of each of Adjusted EBITDA and Adjusted EPS to the most directly comparable IFRS measure:

Forward-looking Adjusted EBITDA and Adjusted EPS included in this release are not reconcilable to their respective most directly comparable IFRS measure without unreasonable efforts, because we are not able to predict with reasonable certainty the ultimate amount or nature of adjustment items in the remainder of the fiscal year. These items are uncertain, depend on many factors and could have a material impact on our IFRS reported results for the guidance period.

Orion Engineered Carbons S.A.
Diana Downey, +1 832-445-3865
Investor Relations

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