Orion SA (OEC) 2014 Q4 法說會逐字稿

... management will be utilizing a slide presentation for this call, which is available now for download Orion Engineered Carbons investor relation page at www. OrionCarbons.com. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. All participants will be in a listen only mode. (Operator Instructions).

At this time, I would like to turn the conference call over to Diana Downey, Head of Investor Relations at Orion. Thank you, you may begin.

Thank you operator, good morning everyone. We issued our earnings press release after the market closed yesterday and have posted the 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 risks and uncertainties as described in the Company's fillings 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 IRFS measures in the table attached to our press release. I will now turn the call over to Jack Clem.

Good morning and thank you for joining us today for our 2014 fourth quarter and full year fiscal year earnings conference call. I'll begin today's call by providing highlights from the fourth quarter and the full year. And we'll 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 2015 before opening up the lines to take your questions.

Beginning on slide 3, we are very pleased with our results for the fourth quarter and the full year. We continue to successfully execute our strategy to grow our specialty carbon black business and improve our rubber black business by growing in our markets while markedly improving our EBITDA margins. Doing this while providing the highest level of quality and service to our customers around the world has been the challenge that the Orion team has embraced and, thus far, accomplished.

During the fourth quarter of 2014, we grew adjusted EBITDA and contribution margin by double digits, and generated a strong cash flow from operations of EUR60.2 million and free cash flow - that is, cash flow from operations less investing activities - of EUR32.9 million.

For the full year, our operations generated EUR172.4 million in cash, exceeding our earlier expectations, which resulted in a free cash flow of EUR108 million.

We believe these results clearly demonstrate the effectiveness of our business to adapt to rapid and unexpected changes in the cost of energy. We also continue to benefit from our broad portfolio of products serving a strong, geographically balanced customer base. In spite of dramatic changes in the price of our feed stock oils, we achieved our financial targets by maintaining margins, meeting customer demand and managing costs.

This robust business model and our focus on cash management enabled us to pay our first dividend of EUR40 million in December, or EUR0.67 per share. We will continue dividend payments of some EUR10 million per quarter in 2015 for each of the four quarters, with the first payment in April of this year.

Turning to slide 4, our fourth quarter volumes were 239,000 metric tons, a 4% increase from the prior year, which we believe exceeded the growth of our relevant markets.

We increased volumes of rubber carbon blacks, primarily in the Americas. In specialties, we grew volumes more broadly as we continued to expand our sales presence and technical marketing support in areas which were previously underserved.

We generated revenues of EUR316.8 million and, more importantly, increased contribution margin by 10%, or EUR9.4 million to EUR103.5 million.

The quarter saw strong movements in oil price and currencies and increased customer uncertainty caused by a number of geopolitical events. Nonetheless, Orion's adjusted EBITDA increased 11.4% year-over-year to EUR48.4 million, which placed us at the top end of our guidance for the full year of 2014.

The increase reflects the impact of our initiatives to broaden our sales and to improve the efficiency of our operations, resulting in strong increases in contribution margin per metric ton and improved volumes, as our team again did a good job in managing costs.

The improvement in this business is evident as we continue to move the adjusted EBITDA margins of the entire business up by 140 basis points to 15.3% from 13.9% in the prior year quarter.

Referring to slide 5, we were very pleased with the results and our ability to deliver on the guidance we gave you when we went public last Summer. Total volumes were 990,900 metric tons, a 2.3% increase from the prior year.

We generated net sales of EUR1.3 billion and contribution margin increase by 5.9%, or EUR23.3 million, up to EUR419.7 million.

Despite increased volumes, revenue declined by 1.6%, mainly as the result of lower oil prices and mix [mix impacts].

We reiterate that in a business that has effective energy pass through mechanisms, revenue is not such a reliable guide to performance. We look to contribution margin as the most accurate view of performance.

Adjusted EBITDA increased again this year, up by 8.6% year-over-year to EUR207.7 million and adjusted EBITDA margin moved up by just under 1.5 percentage points to 15.8%, from 14.3% in the prior year.

I'll now turn the call over to Charles who will go over our results by segment in more details. Charles?

Thanks, Jack. And good morning, everyone. As shown on slide 6, our specialty black segment volume increased by 3,500 metric tons, or 7.7% to 48,800 metric tons in the fourth quarter of 2014, from 45,300 metric tons in the fourth quarter of 2013. This increase in volume was represented by increased demand in Europe and the Americas.

Adjusted EBITDA of the specialty carbon black segment slightly declined to EUR20.2 million in the fourth quarter of 2014, compared to EUR21.5 million in the fourth quarter of 2013, in spite of stronger contribution margins, as below margin costs rose due to our investment in additional resources, the sales presence and technical marketing support throughout the globe.

The adjusted EBITDA margin declined to 21.4% from 23.7% in the prior year period, consistent with our strategy developing volume growth and maintaining stable margins. While this adjusted EBITDA margin is below our historic averages for specialty carbon black, it is not uncharacteristic of the decline we usually see in the fourth quarter when customers are winding down operations for the year. Further, it reflects our investments for growth with stable margins in the future.

Turning to slide 7, our rubber carbon black segment volume increased by 5,600 metric tons, or 3%, to 190,500 metric tons in the fourth quarter of 2014, from 184,900 metric tons in the fourth quarter of 2013. This increase was due to an increased demand in North America, which was offset by somewhat weaker demand in Europe, Brazil and South Africa.

Adjusted EBITDA of the rubber carbon black segment increased by EUR6.3 million, or 28.3% to EUR28.3 million in the fourth quarter of 2014, from EUR22 million in the fourth quarter of 2013, reflecting the benefit of gross profit development, taking into account the elimination of changes in depreciation.

Adjusted EBITDA margin grew 270 basis points to 12.7%, compared to 10% in the prior year period.

Moving to slide 8, I will provide an update of our balance sheet and cash flows. As of December 31, 2014, the Company had cash and cash equivalents of EUR70.5 million. The Company's non-current gross indebtedness as of December 31, 2014, was EUR670.2 million, mainly comprising the non-current portion of our new term loan liabilities net of transaction costs of EUR669.8 million. The dollar denominated portion of this loan increased during the fourth quarter when converted to euros, based on the year-end 2014 closing exchange rate. Current liabilities to banks, as of December 31, 2014, totaled EUR9.6 million. Net indebtedness was EUR621.7 million.

Cash inflows from operating activities in the fourth quarter of 2014 amounted to EUR60.2 million consisting of a consolidated loss for the period of EUR8.3 million, adjusted for depreciation and amortization of EUR20 million, as well as cash and non-cash finance costs of EUR23.4 million impacting net income. And a decrease in net working capital of EUR24.9 million, primarily associated with receivables that reflect the beneficial impact of declining oil prices.

Net working capital totaled EUR219.7 million at December 31, 2014, compared to EUR255.5 million as at September 30, 2014.

Our days of net working capital continue to reflect our focus on cash management and supply chain control, ending the year at 68 days.

Cash outflows for financing activities in the fourth quarter amounted to EUR46.4 million and comprised our dividend payments on December 22, 2014, of EUR40 million, repayments of local credit facilities of EUR9.6 million, repayments on the new credit facility of EUR1.7 million, and interest payments of EUR9.5 million.

Cash flow from financing activities was positively affected by cash received from realized gains from foreign currency derivatives of EUR13.5 million, representing short term foreign currency hedges against the U.S. dollar portion of our term loan entered into concurrently with the IPO. Effective with the year-end of 2014, these short term currency hedges have not been renewed.

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

Thanks, Charles. Now, please turn to slide 9. I would now like to provide you with an overview of the markets as we see them today and how we see them developing in 2015.

North America continues to be a strong market for Orion, and we believe it will strengthen during the year. Falling fuel prices have had a direct impact on miles driven, the housing markets are continuing to recover, and that the recent tariffs imposed on certain imported tires, demand for carbon black is expected to be strong.

Our facilities in this region have been running very strong and are near their capacity limits. The announced tire company investments in U.S. production capacities are proceeding at pace.

In Europe, the economy is not as strong as in the U.S. But it's slowly recovering in line with our expectations. The markets for our specialty carbon blacks produced in this region have remained strong while global demand for products produced in Europe continues to grow.

After closing our plant in Portugal, we absorbed the business in other facilities which [topped] our capacity utilization in the region.

Our footprint for rubber blacks in Asia is concentrated in Korea. Here, we have been seeing signs of slower growth as some of our customers fight the tide of stronger currency and Chinese competition.

The Asian specialty carbon black business remains strong and has been bolstered by our build of resources in the region, although Korea did see some slowdown - again, as a result of currency headwinds.

Nevertheless, we have had a very strong mix of premium products driven by our sales push, which we believe will continue to positively impact adjusted EBITDA.

As mentioned earlier and discussed in our last earnings call, Chinese tire import duties are being implemented at levels that will make many of their products uncompetitive in the U.S. There was a surge of these tires into America at year-end. And we felt that, in January, as our customers that serve the tier two and tier three levels we hurt by imports attempting to get in under the wire.

We're not sure how long it will take to work down this inventory, but I do not see it lasting past the next few months.

The Chinese tire industry is quite large so we have to be aware that some of these volumes will show up in other regions that we serve.

We are likely to experience some higher imports into the U.S. as tires from other Asia Pacific countries besides China, as seen during the previous imposition of duties. But it is too early to determine how this will play out. We will update you, however, on our view of this as the year progresses.

Finally, in South America and in South Africa, demand remains weak. With our having only one plant in Brazil, we had been able to keep operating rates fairly high, and our exposure, therefore, to this is struggling. The economy has not materially affected out our business so far. And while the South African economy remains a weak, we expect our business in the region will deliver results consistent with the recent past.

On slide 10, the main takeaway here is that our major markets remain relatively stable. There continues to be strong secular growth trends in North America and Asia Pacific, while Europe, although weaker, is experiencing a slow recovery, which we hope to see strengthen in 2015.

Turning to slide 11, as you've heard, we're satisfied with our results for the quarter and the full year of 2014. As we move into 2015, we'll continue to execute our strategy and deliver the results of the effort we outlined when we went public in 2014.

Our key markets are performing in line with our expectations and we're benefiting from the initiatives we put in place to grow contribution margin and control expenses while generating robust cash flows.

Looking ahead to 2015, and assuming the market and financial environment continue according to our expectation, we see full year adjusted EBITDA to come in between EUR210 million and EUR225 million.

Under these assumptions, we also expect another strong year of cash generation with an effective rate around 35%, consistent with prior year.

With that, operator, please open up the lines for questions.

Operator: Thank you.

(Operator instructions).

Thank you. Our first question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

Hi. Good morning, everybody. Congrats on a nice quarter.

Thanks, Kevin.

In terms of - one of your competitors mentioned that they lost 15% of their market share in the U.S. And I was wondering if you were picking up any of this? And, if so, could you help us understand what type of benefit that could be in 2015?

You know, Kevin, we've talked about our volumes for the year and for the quarter. It's easy enough for us to say that we believe we've grown at a greater rate than the markets in that particular area. But any further speculation on how much share shift there was between competitors, I think, is, kind of, off limits for this call.

Sure. OK. And then looking at your FAQ slide a little later in that presentation, why was the oil price windfall benefit smaller in the fourth quarter compared to the second and third quarters? And what are your expectations to the earnings impact from lower oil prices in 2015?

Hi, Kevin. It's Charles. Yes. I mean, what happened, we think - we know now was the oil falls in the fourth quarter were obviously rapid and pronounced. And the speed of the falls coupled with - particularly in December where, in the second half of December - particularly in Europe and the U.S. - things shut down meant that there weren't necessarily the sales available to take advantage of some windfalls. A long story short.

But two factors. The speed of change and the change over the December holiday period caused that effect.

You know, obviously, we've seen falls of this magnitude before, so to speak, in 2008 and '09 with a very different economic background. And I think the learning - for us at least - is the profile and effects of each of these almost seismic changes in oil prices have their own fingerprints. And that was the fingerprint of this particular change.

OK. Great. And just a final question. Could you update us on any progress towards compliance with the EPA in the U.S.?

Sure. I would just simply say we're, sort of, at the same situation we've been in at the past. You know, we've got discussions ongoing right now with the EPA, as well as discussions with our indemnifier - that is, Evonik. Those discussions continue as they have been before. We're making progress on it. But I would say that there's not a significant change in the circumstance from where we were last time we talked.

OK. All right. Great. Thank you very much.

Our next question comes from the line of John Roberts with UBS. Please proceed with your question.

Thank you. I believe your sourcing folks are often able to find pockets of raw materials at significant discounts to the contract benchmarks - the benchmarks in your contracts. When raw material markets are volatile like this, are there more opportunities than normal to do that? Or does the market become less liquid and, therefore, fewer opportunities to buy below the benchmarks?

A great question, John. There's a lot of moving parts on that because there's a lot of different types of raw materials. There's arbitrage opportunities around the world. There's coal-based materials, there's petroleum-based materials, steam cracker materials. All of them depend on different types of inputs and different type of freight rates. So, yes. When there's volatility, sometimes windows open. Sometimes they close.

I would say probably the most interesting thing to comment on thatch is when prices fall, typically, businesses like ours - when the cost of raw materials fall, businesses like ours don't see as much savings in the energy initiatives that they have on tap. It's not a material impact on us. But that would probably be the largest issue there.

While with respect to greater opportunities in volatility, yes; probably. But not such that it's a situation that we look forward to. Our view is when we have stable raw material markets, it's actually a better situation for us.

OK. And then maybe as a follow-up - your business is largely currency hedged in euros. And even though you report in euros, I assume that you could choose to be hedged in U.S. dollars if you wanted to so that as the euro weakened, your euro earnings would go up, if you will, and be relatively stable on a dollar basis. Is your European position just to large that that would be too expensive to run the business that way? Or do you just choose to because you report in euros, you'd like it to be stable from a euro currency perspective?

Yes. I mean, this is one of these discussions, John, I think you can get into and never come out the other side. But the upshot is - what we aim to do, actually, is two things. In each of our businesses - let's take the major ones in Korea, the U.S. and Europe - we try to make sure that the cash inflows and outflows - receipts and payments of those businesses - to the extent they're not in the local currency - which for Europe is the euro - in the case of Europe and dollar in the case of the U.S., et cetera, that they're balanced. And if they're not balanced, we hedge on balance sheet foreign currency exposures.

That's the first step we do. And I think that's pretty standard for most companies probably.

The second point, which I think is what you're probably driving at more, is when you take - you translate financial statements in the U.S. or in Korea back to euros, then you have an impact.

I'm not aware - there was one company a while ago, I think, in the farm industry that tried to hedge that. But that translation risk is very difficult to deal with.

If we were a - for the sake of discussion - a U.S. dollar reporter, that was our functional currency, you'd automatically switch that around. In other words, the U.S. dollar - financial [sense] in the U.S. would already be in the home currency and you would be translating the euro-based financial statements to dollars.

So I think that's the big factor. In other words, it all, sort of, from a translation point of view - which is the big effect for us - it would automatically switch if we switched our functional currency.

Could you have a functional U.S. currency and still report it in euros?

Yes. I believe so. Yes.

OK. Thank you.

Our next question comes from the line of Jeffrey Fischer with Barclays. Please proceed with your question.

Good morning, fellows. Just a follow-up on currency. When you look at your guide for this year, the EUR210 million to EUR225 million, year-over-year, how much currency benefit is there in that number?

Assuming that the dollar - and I think we're primarily talking about the dollar and the movement associated with that. Assuming that the dollar is at about between 1.10 to 1.15, 1.16, we expect high single-digit benefit - call it EUR7 million or EUR8 million - something like that.

OK.

I mean, there are a number of assumptions there. And, obviously, it depends on the distribution of our business, as you're well aware. But that order of magnitude. But that's the sort of measurements I think I would use.

OK. And then if oil stays where it's at, how much more - or how many more dollars will you be able to take out of working capital, do you think, and push through cash flow this year?

Yes. That's a good question. Let me answer it, but let me just take one slight detour. Bear in mind, our working capital levels are impacted by two factors. And I've addressed that in the back of our presentation slides in the frequently asked questions. The two factors - obviously oil. And I think there's another - we think there's another probably 15, maybe 20 - the timing of this is pretty difficult to judge - million to go in terms of our year-end cash position. Right.

However, working against that - it's a smaller effect, certainly - is the fact that working capital that is denominated in dollars, obviously, with a strengthening dollar, increases it in terms of euros. So that drives up the, if you like, euro value of that working capital. So you've got those two factors.

But the bottom line is - above all, the bottom line is we expect a strong cash flow generation in the first half of this year. Not only because of the business itself, but because of the factors we've just been discussion.

OK. And then just the last one on tires in particular. Obviously, you guys have more insights than we do. Where do you think they are, kind of, with the de-stocking cycle. Obviously, you don't want to hold inventory if you think oil's going to roll through at a lower price. So is there more to go? Or how would you think about the timing of the inventory cycle for tires globally?

We do have a little bit more insight just simply because of the information that we gain from our customers, although I don't think there's total transparency with respect to their inventories and such. But just the sense of the order patterns and such, I'd say that it depends a little bit on the regions. But the U.S. kind of an interesting situation with the surge of imports at the end of last year attempting to get in under the wire of these Chinese imports. We think that'll play out over the next couple of months, if it's not already about to play out.

Europe - my sense there is that the de-stocking is over. There's probably some place still - not with the tire customers but with smaller customers - waiting a month or so for lower prices. But that also, given the recent rise in the price of oil, is about to be over. So I sense that that's about played out.

Korea - they went through a significant de-stocking process, really, through the last half of last year. At this point in time, we don't really see it. It seems like their volumes remain pretty strong and have no real indication of that.

And Brazil - again, kind of, the smallest player there. So what we see is our supply chains that we committed to and our customers committed to some time ago, there probably was some - appeared to be some at the first of this year. Hopefully, that's playing itself out right now, too.

But the big players are North American, of course, and Europe. And I think those are about over.

Great. Thank you, fellows.

Thank you.

Our next question comes from the line of [Eugene Fedechko] with Key Bank. Please proceed with your question.

Good morning, guys. Congratulations on the good quarter.

Thank you.

Yes. Thanks. Good morning.

I looked at your guidance - EBITDA guidance for 2015. And it seems like you [U.S.] (inaudible) options behind, maybe, the midpoint of the guidance continuing growth at the GDP rate and stable oil prices. But can you provide a little bit more color as far as risks? What would it take for you to come in at the low end of the guidance or high end of the guidance?

Well, let me comment first. And then Charles can take it from there. Of course, our guidance is always going to be based on a set of assumptions. And the first assumptions are what's going to happen with market demand. And that's going to be the largest driver because, as you probably know, most of the pricing that we have is set at this point. So price risk is something that's not necessarily at play, although it's always out there and there's competitive activities around. But, largely, we would say the biggest nod looking forward to 2015 would be the market risk.

And there, volumes can move up, move down. We have a very bullish assumption - aggressive assumption, I guess, on North America. We think that's probably pretty solid. We're operating rates right now in the U.S. are very strong. And we think they'll actually strengthen as we get into the second half of the year.

Europe - it's probably a larger question mark for us. We think it's recovering. We think the recent actions by the ECB and so forth are going to continue to win those economies. And, hopefully, continue a slow but steady growth. But I would say, from a market demand standpoint, that's probably the largest question mark that we have.

Korea continues to be pretty stable. There are some currency headwinds in Korea, but those - they, kind of, stabilized as we got to the end of last year. Hopefully, we'll continue to see that stable. And their currency is not necessarily the translation issues that Charles would talk about, but simply our customers' ability to compete in those regions.

So, I guess, from a business standpoint, that would be the largest issue.

The second would be raw material changes. And there, as you know, we have a lot of pass through. But mostly pass through mechanisms for not only feed stock but our energy costs. And there I think we're fairly well insulated. I think just given the volatility that we saw last year and our ability, literally, to deliver not only EBITDA but also contribution margin by ton targets that we set out speaks to the sustainability of that business model.

But there also could be really sharp changes one way or the other that could impact this. And I think some of that could be on the up side, some of that could be on the down side. And for the market as well, quite frankly.

So I'd say those are the largest levers. Our costs are fairly well in line. Have been for the last several years. And we haven't had, really, any what I would consider excursion surprises in either below-margin costs or fixed operating costs. So we're fairly pleased with the management of that.

But apart from that, you might get into some of the things that Charles would touch on like currency and (inaudible) like that.

Yes. But, I mean, I think we touched on currency. I think those are the main points, Jack. The products, the business, trading commission.

Thanks for the color, guys. Also when you look at the tariff on Chinese imports for U.S. now - and you talked about the possibility that our Asian regions will supply that volume. So if you look at that - I know it's still probably too early to say - but what kind of regional shift do you anticipate for global production? And how would you benefit from those?

Well, I think, overall, the U.S. will benefit from it. The last time we went through this process, I think the tariffs weren't quite as high as they are this time. The tariffs are pretty high. And I think it's going to make most of the Chinese imports fairly uncompetitive.

We do know that our customers - our tire customers are looking right now to fill some of those gaps. I mean, I think some of the guys that have production in China also have productions in non-Chinese Asian locations. And they will work to shift some of the imports into the United States from those Chinese facilities to other facilities. But the fact of the matter is when they do that, they'll be shipping it to higher production costs and probably higher priced tires, which will make them less competitive.

That being the case, you'll see not only, I think, a diminishment of the Chinese materials coming in because of the import tariffs, but you'll also see what imports that do come in are likely to come in at a higher price, which is, again, likely to stymie, to some extent, the amount that come in.

I'm not trying to avoid your question about what particular impact that's going to have. It's just, I think, a little too early to tell. The one thing I can say is the imposition of Chinese tariffs are not going to push away all the imports of Chinese tires, which, arguably, are the majority of imported tires in the United States. There will be some leakage around [leaking] through other economies. But overall, I think it's going to substantially suppress the supply of those imports.

And I think it probably plays to the construction and startup of these new tire facilities that are being built in North America by the major tire companies, some of which are Asian, by the way, seeing that this is a trend that's probably sustainable.

All right. Thanks. And just a last question on your specialty blacks that you saw pretty strong volume this quarter. Can you talk a little bit about the initiatives that you're doing there, both what you achieved in 2014 and your goals for 2015? Thank you.

Again, it's a fairly complex business that addresses a lot of different markets, unlike the rubber business, which is largely, as you know, tire focused in that mechanical rubber goods focus driven by, largely, automotive. This is a business that really attacks all parts of GDP - housing and so forth. We have some great products there, particularly products for the coatings business, plastics business. And so we will continue to push those products, not only in areas that were previously underserved. As we've pointed out in the past, our predecessor company didn't really serve some of the regions of the world as well as we believe we could. So we've added a lot of technical staff, sales support staff in areas which, heretofore, we really didn't attack.

And you can see in the financials, we've commented on the investment that we've made in specialties to add that staff.

So that's what we consider as a sales push. It's simply the products that we have today which are successful - very successful - in the conventional or traditional parts of our markets being pushed in areas where we have been less represented.

I'd say the other aspect is improvements in products that we have as well as some new product development that's underway right now. All of those, coupled together with what I would consider a stronger focus on just sales and market, a higher degree of transparency because of the better systems that we have today and, quite frankly, just a better, more competent sales and technical staff than we've had over the last couple of years. They're really improving. I think doing an excellent job of marketing the products that we've got and seeding the markets for the new products that are under development currently.

Great. Thank you.

Our next question comes from the line of Paul Walsh with Morgan Stanley. Please proceed with your question.

Thanks very much. Morning, Jack. Morning, Charles. I've just a few questions, if I can. On the gross margin developments, particular in the rubber carbon black business, I'm just curious to see how sustainable you think the recent gains are. You know, how much is down to low oil and the temporary, sort of, dislocation between your selling prices and raw materials? Could there be any normalization? Or is this a new level in the fourth quarter from which we can expect to work from?

And secondly, just on the specialty carbon black business, you talked about some slightly higher costs in the fourth quarter. I'm just wondering if you could expand on that and, sort of, what that means for 2015?

And then maybe just some housekeeping for me if that's OK? On the D&A, you're expecting around EUR80 million in charge this year. And on working capital you talked about EUR15 million to EUR20 million still to come from low raw material prices. But what's the, sort of, general thinking around working capital in 2015? Is it a reduction of EUR15 million to EUR20 million? Or are you looking to hold it steady with underlying capital outflows offsetting the oil effect?

Thank you.

Let me tackle the first two - the rubber margins and the specialty costs first, Paul.

Thank you.

And good morning, by the way.

Good morning.

You know, we set out to improve these rubber margins roughly 1 to 1.5 percentage points per year. And we've proceeded well on that target driven by not only expansions of our footprint [and] dealing with fixed costs but, more importantly, dealing with the operating efficiency of the business. We've improved our raw material purchasing, our conversion, our yield conversions, our energy costs throughout the system. And that's largely driven this margin expansion.

So you can look to changes in the cost of oil. A windfall here, a windfall there. But that's, sort of, a bit of side show considering what's going on in the fundamentals of the business, which is simply improved yield and better purchasing of raw materials.

So I think yes. The question is is it sustainable? I think we will continue to improve on that rubber margin with the initiatives that we have in place as we move forward.

The specialty costs I mentioned to the previous questioner that we had invested quite a lot in new people in the areas that we didn't have the people pushing our specialty products before. We focused a lot of new efforts in our Chinese market, also southeast Asia market. We've added staff in South America. And we've added additional staff in traditional markets such as Korea, Europe and North America. And that's the buildup of costs that we've had in that specialty.

I don't see us building at the rate going forward that we've built from '13 to '14 in that area, if that's your question. There could be some additional incremental costs. But they're not going to be a growth in cost for below-margin expenditures for that in specialty that we've seen in the past.

I'll just add to that point on specialties. I think as we hope, as we look into this current quarter, that we'll see the numbers absolutely confirm what Jack's just said. We can see this business is in good health when you look at the development of the gross profit margin per ton.

And so these effects are investment type expenditure effects that are designed to boost the business and, indeed, are.

To answer your question about D&A, just a reminder. It's the EUR80 million or so, EUR60 [million] is depreciation, EUR20 is amortization and acquisition related intangibles. So I'm pointing that out because I think we have very - just looking at this now, we have very quick depreciation rates in this Company. And we've just actually undertaken a study of that in Q1.

So we'll come back to you on that at the end of Q1 into Q2. But we certainly would not expect depreciation to go up. And, indeed, may well come down a bit. But we'll be more specific when we finish that study.

Working capital days - I mean, we're not the world's most aggressive manager of working capital. We were 68 days at the end of the year. We certainly want to hold it at that.

We don't do any [dis-kerning] of receivables. Obviously, we could get that number down if we wanted to. But that's not what we believe is productive for the business.

We think that cash is going to free up, Paul, to answer your question. And we don't think it's going to be sucked in by other factors driving out working capital. So we think that's real cash that will drop to the bottom line. And drop to the bottom line of cash, so to speak, in the first half of 2015. That's our expectation.

OK. Can I just follow up, gents, on the guidance then? Because it feels like a lot of the margin improvements, particularly in rubber carbon black, are just fundamental. I mean, there's nothing one-off about them at all. And I'm just curious on the guidance. I mean, if I just take the base of 207 and add the currency gain that you talked of of between seven and eight - I mean, you're getting to the middle of that guidance already. And so, even at the upper end, it doesn't seem to be pushing the bar. So just curious as to how much conservatism you're baking into that guidance. Or is there something I'm missing?

No. I mean, we've just started the year, Paul. And, you know, as the year unfolds, we expect to narrow that guidance. And, you know, we're still, sort of, very much of the mindset of a recent IPO ...

Sure.

... that you [tend] to give guidance on, if anything, make sure you hedge it well.

But the main factor, it's early in the year. We like the way the year has started. We know that some companies don't even give any guidance. (Inaudible) that's right. Obviously, we want to be performing well and being perceived as good performers in the market. And we're trying to continue to build our track record in that regard.

That's very clear. Thanks a lot, guys. Well done.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

OK. Well, thank you very much for your attendance and your attention today. We hope that we've been clear in our presentation. And we hope that you understand our business.

We're very pleased, of course, as I said earlier, about our progression. I think this movement of our overall business EBITDA margin up to nearly 16% from where we started this business some time ago is a significant accomplishment. It's on the backs of a continued great business in specialties, its 25% EBITDA margin and a continual march upwards of our EBITDA margin in rubber blacks.

Depending on the development of the markets, we, again, feel very comfortable with the guidance that we have given. As Charles said a little bit earlier, as we proceed through the year, we (inaudible) that guidance, change it as we see necessary, tighten it as we become more confident as we go forward.

But, in the meantime, we appreciate the attention. And thank you for your time this morning.

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