Orion SA (OEC) 2014 Q3 法說會逐字稿

Good morning and welcome to Orion Engineered Carbons' 2014 third-quarter earnings conference call. (Operator Instructions). Today's call is being recorded and we've allocated one hour for prepared remarks and Q&A. (Operator Instructions). At this time, I would like to turn the conference over to Diana Downey, head of Investor Relations at Orion. Thank you, Ms. Downey. You may begin.

Thank you, operator. Good morning, everyone. We released our earnings press release after the market closed yesterday and posted a slide presentation to the Investor Relations portion of our website at www.orioncarbons.com. We will be referencing the slides during this call.

Today's speakers are Jack Clem, Chief Executive Officer and Charles Herlinger, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to the risk and uncertainties as described in the Company's filings with the SEC. Actual results may differ materially from those described during the call.

In addition, all forward-looking statements are made as of today and the Company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, non-IFRS financial measures discussed during this call are reconciled to the most directly comparable IFRS measures in the table attached to our press release. I would now like to turn the call over to Jack Clem.

Good morning and thank you for joining us today for our third-quarter earnings conference call. I'll begin today's call by providing highlights from the third quarter and will then turn the call over to our Chief Financial Officer, Charles Herlinger, who will provide more detail on our recent quarterly results. Finally, I will comment on the broader industry trends and our outlook for the remainder of the year before opening up the line to take your questions.

Beginning on slide 3, we are pleased with our third-quarter results as we continue to successfully execute our strategy. Over the quarter, we saw solid growth in adjusted EBITDA and contribution margin and generated strong free cash flow from operations of EUR58.3 million. In light of these solid results, we are reaffirming our full-year 2014 adjusted EBITDA guidance of EUR200 million to EUR207 million.

Turning to slide 4, total volumes were 246.4 thousand metric tons, a slight increase from the prior year. This performance reflected increased volumes in both Specialty Carbon Black and Rubber Carbon Black segments in Europe and North America, which was partially offset by weaker demand of Specialty Carbon Black in Korea and Rubber Carbon Black in South America and South Africa. We generated net sales of EUR329.8 million and contribution margin increased by EUR5.8 million, or 5.8%, to EUR106.1 million. The decrease in net sales was less than 2% and primarily due to targeted individual product mix effects within our two segments, as well as the pass-through effect of declining oil prices. As you know, in the majority of our contracts, we're able to pass along the changes in raw material prices to our customers and therefore, our revenue can be pushed up or down simply by the price of oil with no impact on our contribution margins. This is why looking at contribution margin provides the most accurate view of our business.

Adjusted EBITDA increased 5.1% year-over-year to EUR53.2 million, reflecting the impact of the increased contribution margin and a continued focus on cost control. Adjusted EBITDA margin increased 100 basis points to 16.1% from 15.1% in the prior-year period. The positive development of our contribution margin and adjusted EBITDA in a period of declining oil prices reflects the effectiveness of our oil cost pass-through contract mechanism. I'll now turn the call over to Charles who will go over our results by segment in more detail. Charles?

Thanks, Jack and good morning, everyone. Our Specialty Black segment volume increased by 1.3 thousand metric tons or 2.6% to 51,000 metric tons in the third quarter of 2014 from 49.7 thousand metric tons in the third quarter of 2013. This increase in volume represented increased demand in Europe and the Americas offset by some weaker demand in Korea. Adjusted EBITDA of the Specialty Carbon Black segment slightly declined to EUR26.9 million in the third quarter of 2014 compared to EUR27 million in the third quarter of 2013 due to investments in technical sales and application support resources. Adjusted EBITDA margin declined slightly to 26.6% from 26.9% in the prior-year period consistent with our strategy of developing volume growth while maintaining stable margins.

Turning to slide 6, our Rubber Carbon Black segment volume increased by 0.2 thousand metric tons or 0.1% to 195.4 thousand metric tons in the third quarter of 2014 from 195.2 thousand metric tons in the third quarter of 2013. This slight increase was due to increased demand in the US, Europe and Korea partially offset by weaker demand in Brazil and South Africa. Adjusted EBITDA of the Rubber Carbon Black segment increased by EUR2.7 million or 11.3% to EUR26.3 million in the third quarter of 2014 and EUR23.7 million in the third quarter of 2013, reflecting the benefit of gross profit development offset by some additional administration charges and other items. Adjusted EBITDA margin grew 150 basis points to 11.5% compared to 10% in the prior-year period.

Moving to slide 7, I would like to provide an update on our balance sheet and cash flows. As of September 30, 2014, the Company had cash and cash equivalents of EUR83.9 million. The Company's non-current gross indebtedness as of September 30, 2014 was EUR664.8 million comprised of our new term loan facilities net of EUR19.8 million of transaction costs. Current liabilities to banks as of September 30, 2014 totaled EUR9.6 million. Net indebtedness was EUR609.3 million.

Cash inflows from operating activities in the third quarter of 2014 amounted to EUR58.3 million consisting of a consolidated loss for the period of EUR40.8 million, adjusted for depreciation and amortization of EUR19.2 million, exclusion of finance costs of EUR67.8 million impacting net income and a decrease in net working capital of EUR20.8 million primarily associated with receivables that reflect the beneficial impact of declining oil prices. Net working capital totaled EUR242.8 million at September 30, 2014 compared to EUR255.5 million as of June 30, 2014.

Cash outflows from investing activities in the third quarter of 2014 amounted to EUR17.6 million and comprised expenditures for improvements in the manufacturing network and maintenance projects throughout the production system. We plan to continue financing our future capital expenditures with cash generated by our operating activities.

Cash outflows for financing activities in the third quarter amounted to EUR1.2 million comprised of our repayment of borrowings in the amount of EUR559.6 million, cash received from new term loan financing net of transaction costs of EUR650.2 million, interest payments and early redemption fees of EUR66.2 million, as well as income received of EUR15.4 million mainly associated with the hedge of our US dollar-denominated indebtedness.

Our short-term borrowings decreased in the third quarter of 2014 by EUR36.7 million. I would also like to announce that, following the refinancing, we are now able to realign our internal financing arrangements. We intend to reflect a one-time non-cash accounting entry of EUR10 million in the quarter ending December 31, 2014. A portion of equity reserves are to be reclassified through financial expense. This adjustment will improve our group effective tax rate and will have no net impact on total equity.

I will now turn the call over to Jack who will provide some additional color on our key markets and geographies and then we will finish up with outlook.

Thank you, Charles. Now please turn to slide 8. Over the last few months, we've seen large swings in currencies, the decline of oil prices and some negative headlines regarding economic development in both Europe and Asia. Given all this activity, we want to take a step back and provide you with an overview of the market as we see it today.

As we move into the final quarter of the year, we are experiencing stable trends in our primary geographies. Beginning with North America, this continues to be a strong market for us and we see it strengthening over the next year. US gasoline demand is running ahead of last year and we expect that to accelerate as the price of gasoline continues to fall. This should lead to stronger demand for replacement tires. Our facilities in this region have been running very strong.

In Europe, the economy has not recovered like we would have wished; however, we anticipated many of these headwinds earlier this year and the region continues to perform in line with these expectations. While the economy is not as strong as in the US, the recent realignment of our production facilities has tightened our capacity utilization. In Asia, specifically Korea, we have been seeing signs of weaker growth as some of our customers on the specialty side are affected by their rising currency. Although we saw lower volumes in the region compared to the prior-year period in Specialty Carbon Black, we had a very strong mix of premium products, which positively impacted adjusted EBITDA for the quarter.

The decision on Chinese import duties into the US is due in a few months and most tire producers believe that the duties will be implemented. As a result, we may see an increase in Chinese tires into the US during the fourth quarter as they attempt to deliver before the tariffs are implemented. This will likely pull down demand in the replacement tire market, but our planning has already taken this into effect.

Finally, in South America, demand remains weak; however, with only one plant in Brazil, we have been able to keep operating rates fairly high. Although we are not immune to the weaker demand in that region, it has not materially affected our business so far.

Turning to slide 9, the main takeaway here is that markets that we operate in, excluding South America, remain relatively stable. There continues to be a strong secular growth trend in North America and Asia-Pacific while Europe, although weak, remains stable, if not slightly slower due to macroeconomic pressures. These are the trends that we have experienced so far in the second half of 2014 and anticipate they will continue into 2015.

I now want to take a moment to comment on oil prices and foreign exchange rates. Beginning with oil, we have seen feedstock prices come down since the summer. However, due to our cost pass-through mechanisms, we have not seen a major impact on the business, either positive or negative. Feedstock costs have dropped more substantially during the fourth quarter this year and as a result, we may see some benefit on margin for the upcoming quarter as our customer price indexing formulas may not immediately capture such sharp changes. We would then see a reverse of this as oil prices return to prior levels.

Looking at foreign exchange, a 5% change versus the euro in the exchange rate of the basket of currencies, which is relevant for OEC, mainly the US dollar and Korean wan, impacts our reported EBITDA by some EUR7 million per year. Approximately two-thirds of this impact is translation-related and one-third is transaction-related.

Turning to slide 10, we were pleased with our results during the quarter and our progress year-to-date. We are successfully executing our strategy of growing Specialty Carbon Black volumes and improving Rubber Carbon Black EBITDA margins and believe we are in a strong position to continue this as we go forward.

Consistent with this outlook, we are reaffirming our guidance and expect full-year adjusted EBITDA to be between EUR200 million and EUR207 million and full-year operating income, that is EBIT, to be between EUR99 million and EUR109 million. We continue to expect strong free cash flow generation for the year and intend to pay a full-year dividend of EUR40 million in the fourth quarter of 2014 equating to an estimated EUR0.67 per share. Starting in 2015, we intend to pay quarterly dividends of some EUR10 million per quarter. We have the confidence to deploy this level of cash moving forward while executing our growth and efficiency projects. With that, I would now like to open the line up for questions. Operator, please open up the line.

(Operator Instructions). Rakesh Patel, Goldman Sachs.

Hi there, good morning. Just a few questions if I can. First of all, one of your competitors talked about an increasingly competitive environment for negotiating the 2015 contracts. I just wonder if you could give us a little bit of a flavor of perhaps the discussions that you're having with your customers to the extent that you can say.

Secondly, just one for Charles, I just wonder if I could just check with you that if we think about the normalized earnings for this quarter, stripping out any sort of abnormalities in the finance cost line, then we should be thinking around EUR0.27 per share. And then if you think about the year, just following your guidance, am I right that you are guiding to about EUR1 per share for the year? In which case, the dividend payout ratio seemed extremely high and is that the right rate we should think about going forward?

And then, finally, just given your comments on oil and FX, perhaps you could give us a bit more of a [spear] in terms of revenue for the year bearing in mind your guidance. Thanks very much.

Rakesh, this is Jack, Jack Clem. Thank you for the question. I'll take the first one and as you say, probably leave the next two to Charles. The competitive environment, I would say that as we came into the fourth quarter, that's contract season particularly for the rubber customers and yes, we do see some headwinds there. It was our expectation that we would see some resistance to any type of price movements as we came around the corner into this quarter, particularly in Europe. That is the case. We are seeing typical competitive motion out there, kind of consistent with what we see with utilization rates. Utilization rates right now in Europe are, at least for us, are in the low 80% and that is kind of reflective of the environment that we face.

The United States, on the other hand, we are roughly 90% or so. We are running pretty full and we think the industry is running fairly full. So it provides a bit more support than what we've seen in the other areas. So for the most part, I'd say yes we see the typical competitive environment that we would expect this time of year. More so in rubber, not so much in the specialties area.

And you wouldn't say that's any worse compared to previous years?

I would say it's better than previous years.

Okay, great.

Hi, Rakesh. Charles here. Let me tackle the questions. First of all, you asked about normalized earnings for the quarter. Just bear with me and I'll run through some numbers. In the financial statements, we show earnings before tax for Q3 to be EUR40.1 million and if you add back to that the entire financial results, which has in it at the moment for Q3 obviously the whole refinancing and the effects associated with that as we detailed. That totals EUR67.6 million. So if you add that back, you also add back the non-recurring items, which are principally related to the IPO of EUR6.4 million and then deduct the ongoing finance charge of EUR9.1 million per quarter, that's what we've guided on previously based upon our new refinanced debt structure, you end up with a normalized income before taxes of about EUR24.7 million, EUR24.8 million.

Our underlying tax rate we talked about on a number of occasions. Certainly going forward, we see it 35%. So taking 35% of the EUR24.8 million. In other words, EUR8.7 million, you end up with about EUR16 million, EUR16.1 million of normalized euros, net income for the quarter of, as you said, around about EUR0.27 or so per share. So that's how we read the quarter. Obviously, that's a bit subjective, but it cuts through the inevitable load of traffic there's been in this quarter with the IPO and the refinancing having taken place in it.

Dividend payout ratio, yes, for this year, we will be at about EUR1 plus, we think, earnings per share. But we think we're going to grow that and we think that the dividend payout ratio will, as we grow into next year and beyond, will actually not be that -- will be consistent actually, will be something we're certainly comfortable with. This is a high cash flow generative business. We've talked about that before and we've been asked previously what we were going to do with our cash on a number of occasions during the IPO and the last earnings call. And this in a sense is an answer to that question.

I think your final point or question was what do we see for the shape of revenue for the year. Bear in mind, obviously, we don't predict oil prices, but they're obviously coming down a lot or have come down a lot. Exchange rate plays a role as well. But we see cutting through it all around about EUR1.32 billion or so, give or take a bit, of total revenue for this year. I'd just like to emphasize and actually touch on this again today, but the revenue number is something that is obviously relevant because it's the top line of the business, but with the effects of oil pass-through, in particular, it's not necessarily a good surrogate or indicative measure for the profitability performance of the business and the underlying performance of the business. We internally inevitably therefore tend -- we don't disregard revenue certainly, but we tend to look a lot at volume and margins and obviously the EBITDA and bottom line.

Great, that's very helpful. Thank you very much.

Kevin Hocevar, Northcoast Research.

Hey, good morning, everybody. I was wondering if you could -- one of your competitors commented that there was a destocking going on during this fourth quarter as raw materials have been coming down and customers have been holding off on purchases while raws have been coming down. Have you noticed that and do you expect it to have an impact on this fourth-quarter result on your volume?

Kevin, we really haven't seen that behavior. A lot of the supply chains that we service are fairly long and sophisticated. To push that around such as that in anticipation of lower prices typically is confined at least in our experience to some smaller customers that don't have a lot of impact on that. I did comment in our discussion that we do expect perhaps some slowdown in the replacement tire market at the end of this quarter as some of these Chinese imports try to get in under the wire for the countervailing duties and antidumping duties. But in terms of people just holding off purchases, we haven't seen that, not in the third quarter and not at the beginning of the fourth quarter.

Okay. And then in terms of Europe, I was wondering if you could comment on what you're seeing there too because it seemed like I believe you were down in Europe in the first half of the year and then in this third quarter, volumes looked like they picked up a bit whenever most industries were seeing volumes do the opposite. So just wondering what you're seeing out of Europe and what your outlook is for Europe as well.

This past quarter, I'd say roughly stable versus last, just looking at the figures here, up a bit in volume third quarter over third quarter in Europe. So up a bit and our operating rates have actually tightened a little bit as we've moved into this fourth quarter.

Okay. And my final question is I was just curious your outlook for the US because my understanding is as all this tire capacity is coming online in the US, utilization rates should get pretty tight. So what's your outlook for 2015 in the US? Do you expect utilization rates to get pretty tight and do you think that pricing could be an opportunity for you in 2016 as a result?

Well, we don't really like to give guidance on pricing and that type of thing. I will speak in just a bit of color on what we think about North America and it will be a repeat of what people on the phone have heard before. We do see the capacity coming on. We don't see supply coming on necessarily, so we think there will be a tightening as we get into 2015. It is our expectation that we would see that begin to come to force probably maybe second quarter, some time mid-year 2015, which would be according to the plans at least that we understand from the tire companies who don't seem at all to have backed away from their investment plans in the new capacities here in the US.

Okay, thank you very much.

John Roberts, UBS.

Thank you. Your 2014 CapEx guidance is a little lower than I was modeling. Is there anything being pushed out into 2015 or is it still a good preliminary number for 2015 around EUR40 million?

There could be some pushover, John. We're still working on that right now. Some of the CapEx programs we tackled turned out to be a little bit more complex, took a little bit longer. Resourcing it has been a bit of an issue in the United States. Engineering capacity is tight here, so we could see some pushover of these figures into next year.

And then any update on timing for the EPA settlement?

No update. We continue in our negotiations and our discussions with the EPA. I mean we have frequent discussions with them. We're exchanging ideas back and forth, but the discussions still continue.

Thank you.

Paul Walsh, Morgan Stanley.

Thanks very much. Good morning, Jack; good morning, Charles. Thanks for taking my questions. Maybe two operating or business-related questions and then two technical questions. The margin and performance in the Specialty Carbon Black business looks very good and I'm just wondering if we're seeing better mix in there? Are we seeing some of the cost-saving actions playing through more aggressively? Just any more insights on that would be helpful.

Secondly, any update on the acquisition of the assets from Evonik in Asia, any further updates on that and then just two technical questions. Just to clarify on the dividend, a EUR0.67 dividend and around EUR1 of earnings, did you say, Charles, that you were happy with that level of payout ratio going forwards? So if earnings are up next year, we should expect the absolute dividend payment to go up along the lines of like -- because at the moment you're saying EUR10 million a quarter for next year. So I'm just trying to figure out what the real metric is. And then just, finally, on net debt, a simple one, where do you see net debt coming in now at year-end given the payments out in the fourth quarter? Thanks a lot.

Maybe just pick up the dividend stuff. To be clear, as we had in the earnings release, next year, we're looking at EUR10 million of dividend per quarter. My point was quite simply as our earnings, net earnings increase, obviously that dividend payout ratio will accordingly change as well. That is the only point I was making.

So it will come down effectively if the earnings grow?

Yes, absolutely.

Okay, understood. So we should expect a baseload of EUR40 million a year from here?

That's right. That's our intention at the moment. Now in terms of -- you asked where we are going to end up in terms of debt levels at the end of the year. We will probably end up with cash prior to the payment of the dividend, north of that EUR90 million. Then we will pay the dividend at the end of this year, EUR40 million. So you can obviously figure out where we end up with cash and our debt will fundamentally be where it is assumed to be where it is at the moment. Obviously, it can move around a little bit with exchange rates, but that's the metric. So around about leverage, not a lot different to where it is now. Maybe up or down a little bit.

I understand.

And Paul, just working on your two questions, let me comment on the specialty piece first. You're right; the margins have moved up. I'll just comment on the pieces and parts of that because there are a number of different factors playing there. One is that we have increased our volumes, so overall margins are going to rise just as we spread the costs around or across those increased volumes. Two, we've had some very nice success with some premium products, which has tended to lift the overall margin. Three, we've extended some of the products into areas which we haven't been in before, so we've picked up some just additional volume at roughly the same type of margin and sometimes we pick up at lower margins, but because it spreads across fixed costs, your gross profit margin will move up.

With respect to the cost-saving piece of that, actually the operating cost initiatives that we've undertaken have primarily benefited our Rubber Black business and not the Specialty Black business. There is a spillover effect as we improve feedstock purchasing and some of the efficiency measures, but the majority of what we talk about in operational efficiencies accrue to our Rubber Black business.

With respect to fixed costs, we've actually stepped up fixed costs in our specialty area. You can kind of see that and what we've done is we've just added additional technical resources around the world in areas which heretofore were not necessarily addressed as well as we thought they should have been. We've opened up some sales offices where we didn't have sales offices before. We've hired some technical support people for application support and so forth. So that's actually a cost increase for that area, but it's an investment that we think is well worth making.

With the negotiation with Evonik, discussions and negotiations continue with that between us and them and between them and their joint venture partner for the facility in Qingdao. We're still optimistic about that. Hopeful that it could come about, but, in any event, we still remain subject to the ongoing discussions between them and their partner.

And just maybe one final question if I can. Charles, does the payment of the divi and your confidence in the use of cash say anything about your potential outlook for the settlement in North America or not with the EPA? Or is it totally unlinked?

Totally unlinked. We've been consistent with our view on how we expect that to come out, the settlement and we run the Company consistent with what we tell you about the outcome of the settlement. So they are unlinked, but yes, that's the basis on which we run the business.

Thanks a lot, guys. Thank you.

Jeff Zekauskas, JPMorgan.

Hi, good morning. Your cost of goods sold I think was down about 5.5% and your volumes grew. Why was that?

Well, there was a pretty dramatic drop in the price of our energy would be the largest factor. And we've got efficiency measures which have come into play as we've moved in through this year.

So the meaning of that is that your margins are temporarily widening out because prices are not moving lower as fast as your energy costs are dropping? Is that the analytical force of what you just said?

Well, cost of goods sold and volume are two different issues not necessarily related as I understand your question at least to price. I would say that cost of goods sold is going to fall as a result of this fall that we've seen in the price of energy during this period of time. Volumes are going to move up as you have seen. Volumes have moved up more sharply, of course, in Specialty than they have in Rubber and then we've got the efficiency measures, which have come into play improving just the overall resource efficiency in our Rubber Black business. But I'm not sure I'm totally capturing your question. Maybe I'm missing something.

I can follow up afterward on that. The second question is philosophically I thought that the direction of Orion was that Specialty EBITDA growth in general would be faster than Rubber Black EBITDA growth and what we've seen is that the Specialty Black EBITDA growth is, for this quarter, pretty flat and Rubber is pretty great. So why is it in general that the Rubber dynamic from an EBITDA profitability growth standpoint is so much better in Rubber than it is in Specialty and does that surprise you?

No, it doesn't, in fact. We feel pretty good about our EBITDA growth in Specialty when you consider where we were and where we've been and year-over-year. The issue relative to Rubber is the fact that Rubber had such an opportunity to catch up. It was what we would consider a fairly mediocre mid-level type of performance when we took this business over. If you take it back to 2009, 2010, we're talking about a single digit EBITDA. So to move that up, there's just a lot more headroom to move from 7% or 8% up to where we were last quarter, roughly 11% to 12% than there was to move the EBITDA margin up in Specialty. And our goal is to grow the Specialty business at a greater rate than GDP around the world and actually at a better rate than what we've seen in terms of overall Specialty growth. I believe we've executed that strategy as well.

Jeff, it's Charles here. Just to pick up on almost your last two points. First of all, we want to grow both segments for reasons actually motivated in different ways, as Jack has just described and he's talked about before. But going back to your first point, even though you were talking about volumes and margins, as I mentioned when I reviewed the slide on Rubber Carbon Black at the start of the discussion today, we do have some timing effects. We had them in Q2 as well due to the falling oil and the lag in pass-through in this quarter. So that [plays as well]. It wasn't quite your question, but I thought I would just get that on the table as well in case you were thinking in that direction.

Maybe a different way of asking it is -- in general, are you pleased that oil prices are going down for your business or are you displeased or are you indifferent when you look at the business over the next year?

There are a number of factors and Jack can chime in as well. But in a fundamental sense, we're fairly agnostic. Now we've talked about before the pass-through price -- the price pass-through model is an important feature of our business model. Depending on the rate of decline of oil or the increase in oil, you can have some temporary timing differences, what we've referred to way back when we did the F-1 is windfall gains or losses. Obviously, that's one factor. It all depends on timing and rate of drop absolutely or increase. Now, clearly, as oil comes down, the absolute cost of our product goes down as well to our customers. So that arguably makes it more competitive. Although frankly we don't see that as a particularly big issue, but there are factors such as those. But, Jack, do you want to comment on that?

Yes, Jeff, I guess in a perfect world, which, of course, we do not live in, I would look for flat pricing. To me, flat pricing or flat cost of oil, irrespective of where it is, $50 a barrel, $100 a barrel, I just like it when it's flat and stable because it keeps a dynamic from being introduced into the business, which distracts from some of the more important things. Now if you ask me which one I'd prefer, going up or going down, I'd have to tell you I prefer going down because we don't have a circumstance where going down somehow or another crushes our margins, which is so common in many of the oil-related and chemical-related industries. As it goes down, we preserve our margins. If it goes up, we preserve our margins. But going down typically introduces a little bit I guess more convivial atmosphere with customers as opposed to going up. But all things considered, my preference is flat.

Just as a last question, you have the Korean tax issue. Can you talk about that and what the timing of that is? And you said that you are also going to take a charge in order to improve your tax position. How does it improve it? Does it improve your cash taxes or your booked taxes and to what degree does it improve it?

First of all, those two topics are unrelated. Let me go to the Korean tax issues. We've disclosed in our financial statements we've made actually some significant progress there. We think we're not at all far away from a settlement. It's not done and dusted yet and that's why we haven't officially sort of announced it, but we've given commentary on the favorable development of the Korean tax issue in the footnotes to our quarterly financial statement. And that favorable development is described there, so I probably won't take time now repeating it. So generally pleased about that and hopefully certainly when we get on our next call, we can consign that to the history books. And indeed, that's not a trivial matter when you consider the sizing of that, the potential sizing of that when indeed we did our F-1 and the commentary at that time. Now that's the Korean tax issue.

The other topic purely relates to the fact that we have one in particular intercompany account, financing account that results basically in the -- where the company giving the intercompany financing and receiving interest therefore has to pay taxes on that and the receiving company for a variety of technical reasons doesn't actually get much of a tax deduction for those interest costs. So we're able now with our new capital structure to remove that intercompany financing structure and as a result, our effective tax rate improves. It will probably be roundabout maybe up to 40 basis points of improvement, mostly cash effect, need not entirely be cash effect and as I said, the important thing to note is that we just want to signal it up front. All we're doing actually through this adjustment -- it's an IFRS technical thing, but the bottom line is we're actually moving a piece of the equity account from something called other comprehensive income into reserves. It has to flush through the P&L. It's an accounting adjustment. It has no cash effect at all. It's a one-time obviously and it puts us on this footing to become a bit more tax-efficient, which obviously we would like to do.

Okay, good. Thank you so much.

Duffy Fischer, Barclays.

Yes, good morning. Kind of a bigger picture question on oil, when you guys have looked historically and oil prices have come down meaningfully, again helping gasoline prices, helping consumer drive, helping rubber prices in tire, Carbon Black prices in tires, so presumably tire prices can come down, what's been the volume effect and the lag of that when you've looked over the last couple decades?

It would be difficult to pinpoint a specific lag effect. There's just too many different factors that play into that. We clearly see a pickup in what we typically discuss as automotive spend when we see gasoline prices go down. Conversely, we've seen people back away from the replacement tire market when gasoline prices go up. The trigger point seems to be somewhere between $3 and $4 and for the most part under $3 right now, I think most regular gasoline through the United States. So we look at that as an opportunity for increased -- not only increased replacement tire purchases, as people just feel like they've got a little bit more money to spend on their car, but also I think we're going to see an uptick in miles driven because we've certainly seen an uptick in gasoline consumption so far this year and it's before gasoline prices really dropped. But, honestly, Duffy, to pinpoint it and say that there is a six-month lag or a 12-month lag or something like that would be really hard because there's just too many other factors that are coming into play at the same time that those factors are happening.

Okay. And then same question around oil, but this time on inventory destocking, restocking. You said you haven't seen it yet, but again when you looked historically and you've had meaningful falls in the price of oil, what has that done with inventory levels across both businesses for you?

Well, are you talking about our inventory or our customers' inventory?

Well, all the way through the chain really. But I mean just -- what we see in a lot of industries and again, the longer the chain is and this is a fairly long chain, the more levels that can destock or restock and so the father upstream where you guys are, that can be kind of a compounded effect in many industries and I'm just -- have you seen that historically?

Well, let me start at the beginning of our chain at least and that's our raw materials. We pulled out raw materials very dramatically when we first took over this business and we pull them down to a level that we think makes sense for this, significantly below where it was. We've done the same thing with finished goods on the other side of our program. What we do not do as a company is semi-speculate with raw materials either on the purchase side or on the finished good side. What we do is we size our net working capital components of raw materials and finished goods associated with what we think we need to do to provide the service levels to our customers. But to try to play that one way or the other we think is probably not our game; it's more of a speculators game.

With our -- our customers, I'd say the supply chains there for the most part are pretty long and they are also dependent on a lot of the same issues about service levels. That might have been a factor some years back, but I think what I've seen at least is many of the customers now want to make sure they've got a tire in store when they need it and to speculate or jockey the inventories of Carbon Black up and down or synthetic rubber up and down would introduce a dynamic there that I think that they would consider risky and not do that.

When you get over to Specialties, I think you have a lot of the same behavior, particularly from the long lead items. Admittedly, there probably are some of those guys that would say let's hold off, but, again, we haven't seen a material impact there, but this would be smaller volume, warehouse size orders. Again, not what we would consider significant enough to move it around, at least that's our experience so far this quarter.

Great, thank you, guys.

Eugene Fedotoff, KeyBanc Capital Markets.

Good morning. Most of my questions have been answered. I just have a follow-up I guess on the positive impact from the lag of pass-throughs of raw material costs in the quarter. Is there any way you can quantify that for us for third quarter?

Hi, Eugene. It's difficult to do for a variety of reasons by the time it's worked its way through inventory and whatever else. But we're reporting 11.5% margin in the quarter, third quarter, for rubber and it would be -- without that, it would be in the 10%s. I made a similar comment. I think it's a bit larger this quarter, certainly in Q2. So that's the order of magnitude. So you would see that margin into the -- down into the 10%s rather than 11.5%.

High 10%s or low 10%s?

Somewhere in the middle, middle to high.

Got it. Thank you. And also could you remind us what's in other operating expense and then maybe provide some color why it was higher in the quarter?

Yes, that's -- actually I was doing that reconciliation on the line for Rakesh. So it's essentially the IPO-related costs. We've identified separately between our EBITDA and our adjusted EBITDA. That's the main driver of that pickup in expense. So we don't obviously expect to have those again.

Got it. Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Gentlemen, thank you very much for your attention this morning. Good questions, we hope we addressed all of those. Again, we're very pleased with our third-quarter results, pleased with the progress that we've had so far this year in executing our strategy. We think we're on track. We're pleased also as well with the guidance that we're giving for the remainder of this year. We set that stick in the ground at some point in time in the past. It looks like we're going to be able to accomplish that as we saw and we're also pleased as well with our ability to pay this dividend in 2014 and the dividend policy that we're implementing for 2015. So with that, thank you very much for your attention and goodbye.

Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.