Orion Engineered Carbons SA: Orion Engineered Carbons S.A. Announces Third Quarter 2015 Financial Results

Tickers: OEC
SENNINGERBERG, Luxembourg--(BUSINESS WIRE)--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 2015.

'Our third quarter results were mixed as we delivered outstanding results from our Specialty Carbon Black business, but continued to face near term challenges in our Rubber Carbon Black business. Our Specialty Carbon Black business continues to perform extremely well in a difficult macroeconomic environment delivering a record volume quarter. We grew Specialty Carbon Black volumes and Adjusted EBITDA margins and delivered solid Adjusted EBITDA growth of 4.2% in the business compared to the prior year's third quarter. We saw a worsening of the margin challenges in our Rubber Carbon Black business that we experienced last quarter. While we were pleased to see growth in Rubber Carbon Black volume in Europe, North America and Korea, margins were affected by unfavorable feedstock cost developments. Overall, our cash flow remained strong covering our dividend payments and a slight increase in our capital expenditures,' said Jack Clem, Orion's Chief Executive Officer.

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

In EUR Fiscal Year
2015

Fiscal Year
2014

Third
Quarter

Third
Quarter

Revenue 278.7m 329.8m
Volume (in kmt) 258.3 246.4
Contribution Margin 103.5m 106.1m
Contribution Margin per Metric Ton (1) 400.8 430.6
Operating Result (EBIT) 27.1m 27.5m
Adjusted EBITDA (2) 48.0m 53.2m
Profit or Loss for the Period (Net Income) 12.1m (40.8)m
EPS (3) 0.20 (0.75)
Adjusted EPS (4) 0.32

(0.62)
Notes:
(1) The change in Contribution Margin per metric ton (CM/mT) between Q3 2015 and Q3 2014 reflects a negative impact of approximately €29/mT related to feedstock cost developments primarily associated with the Rubber Carbon Black business, which was partially offset by a favorable impact of about €9/mT associated with foreign exchange translation effects.
(2) The change in Adjusted EBITDA between Q3 2015 and Q3 2014 includes a negative impact of approximately €7.5 million associated with feedstock cost developments, partially offset by a favorable impact of €2.1 million associated with foreign exchange translation effects.
(3) EPS calculated using profit or loss for the period (net income) based upon (weighted) number of shares outstanding, which was 59,635k during the third quarter of 2015 and 54,455k during the third quarter of 2014, the quarter in which the company issued new shares at the time of its IPO.
(4) Calculated using profit or loss for the period (Net Income) adjusted for non-recurring items, amortization of acquired intangible assets and foreign currency effects impacting financial results (all adjustments on a net of tax basis assuming group tax rate) based on (weighted) number of shares outstanding.
Third Quarter 2015 Overview

Volumes increased by 11.9 kmt resulting in total volume of 258.3 kmt in the third quarter of 2015 compared to 246.4 kmt in the third quarter of 2014. This rise of 4.8% reflected increased volumes in both the Specialty and Rubber Carbon Black businesses.

While volumes in the quarter rose, revenue decreased by €51.1 million, or 15.5%, to €278.7 million in the third quarter of 2015 from €329.8 million in the third quarter of 2014. This revenue decrease was due to sales price declines resulting from pass through of lower feedstock costs and to a lesser extent due to product mix, partially offset by additional volumes and foreign exchange translation effects from a stronger US Dollar.

Contribution Margin decreased by €2.6 million, or 2.4%, to €103.5 million in the third quarter of 2015 from €106.1 million in the third quarter of 2014, primarily driven by negative feedstock cost developments and regional mix effects in our Rubber Carbon Black business. These were partially offset by a strong gain in contribution margin in our Specialty Carbon Black business and volume gains in our Rubber Carbon Black business, as well as positive foreign exchange translation effects (associated primarily with the stronger US Dollar), and our continuing efforts to improve efficiency.

Adjusted EBITDA decreased by €5.2 million, or 9.8% to €48.0 million in third quarter of 2015 from €53.2 million in the third quarter of 2014 which reflected the development of Contribution Margin and Gross Profit, as well as the impact of unfavorable foreign exchange effects associated with the below margin fixed costs.

Quarterly Business Results

Specialty Carbon Black

Volumes for the Specialty Carbon Black business increased by 9.1% to 55.6 kmt in the third quarter of 2015 from 51.0 kmt in the third quarter of 2014, reflecting increased global demand and further penetration of markets, especially in Asia Pacific and thereby set a quarterly record for the business.

Revenue of the business decreased by €5.4 million, or 5.4%, to €95.6 million in the third quarter of 2015 from €101.0 million in the third quarter of 2014. This revenue decrease was due to price declines resulting from the pass through of reduced feedstock costs to customers and product mix impacts. This was partially offset by foreign exchange translation effects from a stronger US Dollar and stronger volumes.

Gross Profit of the business increased by €2.8 million, or 8.2%, to €36.9 million in the third quarter of 2015 from €34.1 million in the third quarter of 2014, in large part due to a benefit from increased volumes as well as favorable foreign exchange translation effects mainly associated with the stronger US Dollar. In addition, as a result of the review of remaining useful asset lives in the first quarter of 2015 depreciation decreased by €1.9 million prior to offset by foreign exchange impacts and additional capital investment.

Adjusted EBITDA of the business increased by 4.2% to €28.0 million in the third quarter of 2015 from €26.9 million in the third quarter of 2014 reflecting the development of Gross Profit excluding depreciation, offset by the impact of unfavorable foreign exchange effects associated with the below margin fixed costs. Adjusted EBITDA margin was 29.3% in the third quarter of 2015 as compared to 26.6% in the third quarter of 2014. This increase in Adjusted EBITDA margin, while reflecting improved profitability, is also partly driven by the effect of the decline in feedstock costs on revenues.

Rubber Carbon Black

Volumes of the Rubber Carbon Black business increased by 3.7% to 202.7 kmt in the third quarter of 2015 from 195.4 kmt in the third quarter of 2014, reflecting increased demand in Europe, North America and Asia Pacific.

Revenue of the business decreased by €45.7 million, or 20.0%, to €183.1 million in the third quarter of 2015 from €228.8 million in the third quarter of 2014. This revenue decrease was primarily due to price declines resulting from pass through of lower cost feedstock. This was partly offset by foreign exchange translation effects from a stronger US Dollar. The impact on revenues of the additional volumes was offset by regional mix effects.

Gross profit of the business decreased by €6.0 million, or 13.9%, to €37.3 million in the third quarter of 2015 from €43.3 million in the third quarter of 2014. This decrease was associated with negative feedstock cost developments, partially offset by favorable foreign exchange translation effects. In addition, as a result of the review of remaining useful asset lives in the first quarter of 2015 depreciation decreased by €2.8 million prior to offset by foreign exchange impacts and additional capital investment.

Adjusted EBITDA of the business decreased by €6.3 million, or 24.1% to €20.0 million in the third quarter of 2015 from €26.3 million in the third quarter of 2014, reflecting the development of Gross Profit excluding depreciation as well as the impact of unfavorable foreign exchange effects associated with the below Gross Profit fixed costs.

Balance Sheet and Cash Flow

As of September 30, 2015, the Company had cash and cash equivalents of €105.9 million which represents an increase of €35.3 million from December 31, 2014 driven by strong operational performance of the business and a cash effective reduction in working capital of €23.8 million as a result of lower feedstock costs and effective working capital management. Days of Net Working Capital ended the quarter at 64 days, level with the second quarter of 2015.

The Company's non-current indebtedness as of September 30, 2015 was €691.1 million composed of the non-current portion of term loan liabilities (€704.2 million less transaction costs of €13.3 million) and €0.2 million other long term debt. Net indebtedness including €7.2 million current portion of term loan liabilities was €605.6 million, which represents a 2.94 times LTM EBITDA multiple.

Cash inflows from operating activities in the third quarter of 2015 amounted to €30.1 million, consisting of a consolidated profit for the period of €12.1 million, adjusted for depreciation and amortization of €17.6 million and the exclusion of finance cost of €13.9 million affecting net income. Net working capital totaled €188.8 million as of September 30, 2015, compared to €198.2 million as of June 30, 2015.

Cash outflows from investing activities in the third quarter of 2015 amounted to €9.5 million composed of expenditures for improvements primarily in the manufacturing network throughout the production system which are slightly above the expectations for the full year 2015.

Cash outflows for financing activities in the third quarter of 2015 amounted to €25.3 million, consisting primarily of a dividend payment totaling €10.0 million, regular interest payments of €9.6 million and regular debt repayment of €1.8 million.

Organizational Matters

Acquisition of Stake in Chinese Carbon Black Joint Venture

On October 15, 2015, Orion announced agreements to acquire Evonik Industries AG's 52% percent stake as well as Deutsche Investitions- und Entwicklungsgesellschaft mbH's (DEG) 15% stake in Qingdao Evonik Chemical Co., Ltd. (QECC). Please see Orion's Report on Form 6-K on October 15, 2015 for more information about the acquisition of Evonik's and DEG's shares in QECC.

Realignment of Orion Engineered Carbons Business Structure

To better align functions and improve responsiveness to the needs of our customers, Orion is reorganizing its business structure. Effective October 23, 2015, certain departments previously grouped under Global Operations will be distributed to the Specialty Carbon Black and Rubber Carbon Black business lines. We expect that this change will add further operational alignment to the businesses and thus improve their ability to create value within their respective businesses.

Departure of Senior Vice President, Global Operations

Jörg Krüger, Senior Vice President, Global Operations, is leaving Orion Engineered Carbons.

2015 Full Year Outlook

'2015 has been a great year thus far for our Specialty Carbon Black business as we have grown volumes by 4.6%, expanded margins by 400 basis points, and delivered 9% Adjusted EBITDA growth. These achievements reflect the successful execution of our core strategic mission to be the global leader in carbon black specialties. In our Rubber Carbon Black business, we achieved our strategic targets for volume growth (up 2.6%) in some fairly difficult markets, but continue to deal with the transient negative feedstock cost developments which have heavily impacted that business' financial performance. We expect this to continue for the remainder of 2015 and have taken measures to counteract the impact during this year and into next.

As a result we now expect our full year 2015 Adjusted EBITDA to be in the range of €203 million to €210 million. This outlook continues to be based on our current view of the global markets, assumes that volume growth is in line with current GDP expectations, and that current global oil price levels and currency exchange rates remain reasonably stable.

Our strong and sustainable cash flow continued through the year and should result in a significant further growth by year end given our outlook for trading activity and oil prices. This strong cash generation is due in part to a prolonged and sustained fall in oil prices during the year, which has contributed to significantly lower working capital levels employed in the group. Additionally, we have improved our overall inventory and cash management execution which are evident in key performance indices such as DSO. This gain in cash has occurred even while we marginally increased capital expenditures to address certain opportunities to improve our production network. This positive development in cash level has prompted us to initiate a comprehensive review of our capital allocation policy over the next few months, whereby we will be reassessing:

  • our mid-term pipeline of investment opportunities (both fast-payback self-help investments and potential other bolt-on acquisitions);
  • the current and expected impact on the group of our recently announced purchase of 67% of shares of the QECC Joint Venture in Qingdao, China, and the possibility of acquiring the remaining shares;
  • our leverage levels; and
  • different options for capital return such as our dividend policy or potential share buybacks at the appropriate time.
We continue to strive for a capital allocation policy which balances long term value creation with attractive near-term shareholder returns,' said Jack Clem, Chief Executive Officer.

This outlook does not give effect to any contingencies described in Note 12 to our interim condensed consolidated financial statements as at September 30, 2015.

Other factors for 2015 full year:

  • 59.6 million shares outstanding
  • Tax rate of about 33% on pretax income (underlying 35%)
  • Cash capital expenditures of approximately €50-52 million
  • Full year 2015 depreciation of about €48-50 million and amortization of €18-20 million (includes amortization of acquired intangibles of €13 million)
Conference Call

As previously announced, Orion will hold a conference call tomorrow, Thursday, October 29, 2015, at 8:30 a.m. (EDT). The dial-in details for the live conference call are as follow: