Orion (OEC) Q2 2026 earnings call transcript

Thank you, Stacy. Good morning, everyone. This is Chris Cappch, DP of Investor Relations at Orion, and welcome to our 2nd Quarter 2026 earnings conference call. Joining the call are Corning Painter, Orion's Chief Executive Officer and John Puckett, our Chief Financial Officer. We issued our 2nd Quarter results after the markets closed yesterday. We have posted a slide presentation to the Investor Relations section of our website. We will be referencing this deck during the call.

Before we begin, we are obligated to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, August 6, 2026.

Orion is not obligated to update any forward-looking statements based on new circumstances or revised expectations. All non-gapped financial measures discussed during this call are reconciled to the most directly comparable gap measures in the tables attached to our pressure leads and the quarterly earnings deck. Any non-gapped financial measures presented in these materials should not be considered as alternatives to financial measures required by gap.

With that, I will turn the call over to Corning.

Good morning, and thank you all for joining us. On the call today, I will start with a few highlights regarding our strong second-quarter results. The Orion team executed extremely well in an extraordinary time and remain keenly focused on the things that we control. Then I will discuss bigger picture trends in our business that supported our quarterly results, as well as some trade flow and regulatory considerations that we view as favorable looking forward.

After that, I will turn the call over to John Puckett for a more detailed review of our results before sharing some brief concluding remarks and shifting to Q&A.

On slide 3, Orion suggested EBITDA to improve 26% sequentially to $58 million in the second quarter. We are particularly pleased with the results in our specialty segment where responsiveness to demand strength coupled with prompt pricing actions contributing to what is our best quarterly segment performance since early 2022. Specialties saw as Q2 metrics exemplify this business's attractiveness as well as its much greater potential, robust volume gains for geographically broad-based and cross-end markets.

Finally, targeted pricing actions also help preserve the segment's profit, mitigating extreme-teached stock cost volatility. Specialties' excellent results coupled with our rubber segments' steady performance enable us to reaffirm our full-year adjusted EBITDA guidance range despite today's macro uncertainty and limited order visibility into the second half. We are lifting our free cash flow expectations for the full year, primarily thanks to tangible progress in working capital initiatives.

We now expect to generate slightly positive free cash flow in 2026 at the midpoint of our guidance range despite still operating in control conditions.

On slide 4, we highlight our stepped-up execution and intense focus on the factors we can control. As in grains in Orion's culture, we always emphasize safety first, and our year-to-date safety performance has been exceptional with only one injury across all our people, sites and contractors substantially better than chemical industry norms. I would like to thank the whole Orion team, but particularly those who work at our production sites for your commitment to safety.

These results reflect a high degree of operating discipline, let's keep it up. We are also encouraged by our continued progress on plant reliability, supported by operational excellence programs combined with prioritizing our maintenance-cafics on the most impactful projects we are tracking towards our third consecutive year of improved plant reliability. In recent years, we have also worked to diversify our raw material supply options and production recipes, and this is paid off in supply chain flexibility.

Our working capital initiatives are yielding measurable benefits, structurally lower inventories enabled partly by progress in reliability and better forecast accuracy, along with improved payment terms, have been the most impactful leverage. Meanwhile, cost initiatives, including headcount, procurement, and efficiency programs, are delivering, and we remain on track for an annualized gross benefit of $20 million.

On slide five, we discussed recent trends. Overall, our business continues to exhibit resilience despite oil price volatility and considerable global uncertainty. Underpinning demand strength during Q2 was customer preference for more de-risk local supply chains. This favors our business model and footprint.

A bit more color on the specialty segments performance here. In our western regions, the recent top line strength reflects broad-end market participation beyond restocking activity. Demand for products serving coatings as well as wiring cable markets such as infrastructure will particularly help us. Moreover, our customers continue to express their demand for our products reflects genuine orders from their customers.

Pricing actions, meanwhile, have been effective in helping to protect profit. For our rubber business, tire-related demand in key geographic regions has been generally stable, but local tire production rates remain below historical norms. Despite that, the North American spot market was strong in the quarter and exceeded our capacity to accept incremental orders in some instances. We believe our rubber segment is set up for recovery based on several underlying trends like trade issues, the value of local for local business, and some apparent tightness in local supply and demand.

As import levels and challenge inventories continue to normalize, locally made tire-selling should improve foreshadowing tire local tire production rates, a positive for Orion.

On slide 6, we highlight several favorable trade flow and regulatory considerations, which we expect will also contribute to improving fundamentals.

Early last month, the European Commission finalized anti-dumping duties on tire exports from China, ranging from 24 to 45 percent, all but one in its exporter. And the EU's parallel anti-subsidation investigation into Chinese passenger car tires remains ongoing. Moreover, there is a precedent for the European Commission to impose anti-circumvention measures should evidence emerge that there are efforts to bypass import duties.

Given the Chinese imports into the EU dropped 75 percent from peak earlier this year when the anti-dumping duties were originally expected, this final action should reduce Chinese imports and support local EU tire production. Meanwhile, US tire imports have been down versus prior year levels in each of the past four months.

We continue to witness reassuring commitments, including at least three additional global players announcing their tend for a significant capital investment in North America tire production facilities. We believe recently announced closures of old tire cost plans need to be considered against the context of tire manufacturers modernizing, expanding, and scaling their best production facilities. Unbalanced, this is healthy for the industry. Meanwhile, we expect a variety of secular tire and technology trends will contribute to steady and improving carbon black consumers. These include the preference for larger tires, radar wear associated with EV adoption, the shift to all season tires, and increasing standards around abrasion and durability in Europe.

The confluence of these trends should translate into either higher carbon black content per unit or more frequent replacement cycles for both the adoption and the shift to all season tires and increasing standards around abrasion and durability in Europe. The confluence of these trends should translate into either higher carbon black content per unit or more frequent tire replacement or both, supporting our industry's fundamentals. All considered, there are multiple of reasons to believe our rubber segments footprint will remain essential, particularly given the absence of new Western carbon black production facilities. These dynamics underscore the durable nature of our business and our local for local value proposition.

John, over to you.

Thank you, Corning. Slide seven covers our second quarter results at a high level. Adjusted EBITDA was $58 million down 15% versus the prior year, primarily due to lower rubber segment annual pricing agreements, despite 5% higher year over year specialty volumes. Adjusted EBITDA improved 26% sequentially with pricing actions in response to oil price volatility and improved product mix contributing favorably. Specialty was the star performer in our second quarter, with adjusted EBITDA of $39 million, increasing 96% compared to the prior year period.

The 5% year over year volume increase in specialty included nearly 10% growth in EMEA and the Americas. Increased earnings were also driven by pricing actions and favorable mix. Rubber segment adjusted EBITDA of $19 million was 61% lower year over year, but was consistent on a sequential basis. As mentioned, the 2026 contractual price agreements were the main driver of the year over year decline. Also contributing were customer mix and the absorption impact as we reduced inventory levels and improved cash flow. We're really proud of generating positive free cash flow during the quarter, especially given the surge in oil derived feedstock costs. Our working capital initiatives, particularly in inventory and accounts payable, contributed to our success and generated $4 million of cash in the second quarter.

CapEx declined $11 million from the first quarter, also contributing to the $2 million of free cash flow. On slide eight, we get more granular on specialty quarterly adjusted EBITDA, which was the highest in four years. The near doubling of adjusted EBITDA was driven by 5% higher volumes, nimble and proactive pricing actions, and favorable product mix. Demand strength and specialty was broad based and across almost every key in market we serve.

Sales into the general polymer in market were healthy. For example, engineered plastics growth was mid-single digit. Outside the general polymer space, we achieved double-digit gains with our higher value solutions into coatings, wiring cable, packaging, and battery markets. Our success in coatings was particularly notable given the recent softness and global OEM build rates. Above market growth reflects demand for our best-in-class products, supported by our recent expansion projects. Beyond automotive OE, sales of our coating solutions into marine, protective, and industrial markets all performed well. Double-digit growth in wiring cable reflects the success of our newer conductive grades, supporting underlying energy and infrastructure market expansion. Slide nine summarizes our Q2 rubber segment results. Adjusted EBITDA declined sharply over year as expected, but was consistent on a sequential basis.

Lower 2026 contractual pricing, unfavorable customer mix, and an absorption impact associated with internal inventory actions that were intentional were the primary contributors to the lower, year-on-year performance. Tire production rates remain below historical norms in our key regions. However, tire cell through rates are above build rates, and imported tires are trending lower.

So we expect channel inventories will decline and support local tire manufacturing. One interesting note for the quarter, despite the overall year-on-year volume decline, there were signs of tightness in the North American carbon black market as we saw a strong spot demand during the quarter in rubber. Spot market strength was such that we could not satisfy all the requests from our customers. And to be clear, consistent with our closing of several reactor lines last year, it is not our intent, the whole capacity, to backup competitors. Domestic or otherwise. Let's move to slide 10. Thanks largely to tangible progress from ongoing initiatives, working capital was a $4 million source of cash in the second quarter, despite oil being up about 29% on average from Q1 to Q2.

Let me put this into perspective. Based on our sensitivities, unmitigated, this increase in average oil-based feed stocks would have been a headwind of about $60 million in the second quarter. However, our actions around reducing inventory levels and increasing vendor payment terms more than offset this working capital headwind. This is a meaningful accomplishment that the whole team in Orion contributed to.

Corning and I congratulate them on the outcome of their efforts. We will continue to take actions like these to drive free cash flow. Cash flow from operations was $27 million, and CapEx declined $11 million sequentially to $25 million, resulting in free cash flow of $2 million in Q2. Net debt at quarter end was $661 million down modestly from Q1 levels, with a net debt to adjusted EBITDA ratio of 4.4 times, comfortably below our credit agreement leverage ratios. And finally, we ended the quarter with liquidity of $178 million.

With that, I'll hand the call back to point.

Thanks, John. Slide 11 provides a revised outlook and sensitivity. Despite continuing global turmoil, we're reaffirming our full year adjusted EBITDA guidance of $170 to $210 million, which we raised last quarter. This guidance reflects our typical seasonality. Beyond that, we're lifting our free cash flow outlook range, which is now $5 million to free cash flow at the midpoint. This assumes crude oil prices averaging $80 per barrel in the second half of 2026, in line with recent industry forecasts. The $43 million full-year improvement in free cash flow is a function of the progress we have made with working capital lovers, which helped diminish the headwind associated with higher oil-driven feedstock costs. Our rule of thumb sensitivities are on the lines.

Let me conclude with a few thoughts on Slide 12. The operating backdrop remains volatile, but it also creates opportunity for Orion to be entrepreneurial, to find and close on new opportunities, and to demonstrate the resilience and durable nature of our business. Local for Local is a smart, low-risk sourcing strategy, and our commercial strategies to build enduring partnerships with growth-minded customers that value our footprint proximity reliability and dependability. At the same time, our organizational mindset is laser-focused on performance metrics that drive value, including continuous improvement in reliability, and especially in earnings and free cash flow. We believe the actions we are taking today position Orion, regardless of how the macro and geopolitical backdrops evolve. That's Stacy.

Let's open up all for two and a half.

Sure. So the negotiations have started off with some customers, I say typical pattern in terms of sequencing of who's in who's not.

There's a limit to what I can say because it's competitively set up, competitively sensitive of what goes on. But I'd say the setup this year is a little bit better in terms of the imports, the regulatory actions, the tightness we saw on spot, that kind of thing. And I'd say the other thing is customers have experienced this year the value of reliability.

Sure. I mean, seasonally, we typically see specialty a little bit weaker in the third quarter. Europe's an important business for us. So we have some seasonal impacts there with the holiday season in that timeframe. We don't have huge visibility, Chris, to like customer forecasts and very far out. You get them, but there isn't a lot of confidence in them, I'd say. But yeah, I don't think there's anything like super changing in the outlook from our customers at this point.

Sure. So the biggest factors for us there were really volume and mix. So on those areas, like it really depends then, okay, exactly. There's always some ups and downs in one quarter to another. And again, there isn't a lot of visibility around that. There's probably some gain we got on timing and pricing and so forth, which I wouldn't expect to continue. But we don't really have in the third quarter, let me say September is almost always like the biggest month. And it's just hard to speak with great certainty on how that's going to play out right now. But you have our guidance.

I think we're holding on to those terms. Like, that's a value that we created in this timeframe. And I see us holding on to that, you know, just going forward period. That's how we emerged from this stronger than before.

Yeah, keep in mind that how that works through our P&L. But the majority of it is more or less open pricing. So when we've done our pricing actions on it, some of it was surcharge and reflected that. But there's also a fair amount of base pricing that we went in with, which we would expect to maintain through this.

So I think on the formula part, that's really looked to try to basically just be neutral in the overall performance. And that's how we kind of stress that in our script. Again, the big drivers for us was more volume and mix in the quarter.

And then would you say the feet stock market for carbon black relative to other petroleum liquids is generally more tight or less tight. You know, like jet fuel and diesel seem to be the tightest. Is carbon black oil at the other end of the spectrum or how would you characterize it? Well, the good thing about in our industry and the flexibility efforts we've made on different kind of sourcing, storage, containment, supply chains and all that is just a greater flexibility across all of them. So we do sometimes use a middle distillate, which would be impacted by those kind of areas. But we're able to try to move things around to mitigate those costs.

By and large though, we have not had to interrupt and we don't see ourselves interrupting our production based on CBO supply issues.

Right, so it's a great question, Chris. This timing has moved several times. We now believe that we will be coming out in the third quarter. You'll see there's been a lot of energy in Europe about what adjustments and so forth they would make to that. Our best estimate on that is included in our current guidance.

I would like to turn the floor over to Corning for closing remarks. Okay, so thank you all for being with us today. Thank you, Stacy, for helping us through the little glitch we had here. We appreciate your time. We look forward to engaging with many of you next week at the Mizzuho Industrial and Chemicals Conference as well as the UBS and Jeffries investor conferences following Labor Day. So we'll be out and about and look forward to meeting with as many of you as possible. Thanks very much and have a good rest of your day.