Orion SA (OEC) 2015 Q4 法說會逐字稿

Good morning and welcome to the Orion Engineered Carbons fourth-quarter and full-year 2015 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Diana Downey, Vice President of Finance and Investor Relations at Orion. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons's conference call to discuss fourth-quarter 2015 financial results. I am Diana Downey, Vice President, Finance and Investor Relations.

With me today are Jack Clem, Chief Executive Officer; and Charles Herlinger, Chief Financial Officer. We issued our earnings press release after the market closed yesterday and have posted an accompanying slide presentation to the investor relations portion of our website at www.orioncarbons.com. We will be referencing these slides during this call.

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 of 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, March 4, 2016, 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 will now turn the call over to Jack Clem. Jack?

Thanks, Diana. Good morning and thank you for joining us today for our fourth-quarter 2015 earnings conference call. You will see our agenda for today on slide 3. I will begin by providing highlights from our fourth-quarter and comments on our two businesses, and then I will turn the call over to our Chief Financial Officer, Charles Herlinger, who will provide more details on our financial results; review 2016 economic and industry expectations; and discuss our outlook for 2016.

Once Charles is finished, I will return to discuss our operational priorities for 2016, including actions our management team will take in response to this persistently low oil price and its impact on our performance. We will then open the lines up to take your questions.

Starting with our fourth-quarter highlights on slide 4, I have to say that we executed extremely well in the quarter, producing some strong numbers in the face of one of the weakest oil price environments we have seen in many years, and produced the strongest fourth quarter Orion has seen since its beginning. Such performance is a testament to the strong operating teams we have in both of our businesses and their sharp focus on increasing our mix of higher-value and more profitable products to support our position of global leadership in specialized carbon blacks.

We grew volumes by 10% in this quarter, with similar gains coming from both our specialty carbon black and rubber carbon black businesses. Volume in the latter business was boosted by the completed purchase of our Chinese production facility in mid-December. Absent this, our volume growth still would have been above market level at 5.3% in what is historically a seasonally weak quarter.

Adjusted EBITDA increased 4.9% to EUR50.9 million in the fourth quarter of 2015 from EUR48.5 million in the fourth quarter of 2014 and from EUR48 million in our third quarter of 2015. Our adjusted EPS more than doubled this quarter to EUR0.20 per share from EUR0.09 per share in the prior year's quarter, in line with our expectations. These increases were driven by very strong performance in our specialty carbon black business. I'll provide more color on this important business shortly.

Lastly, I would like to call your attention to the fact that we have voluntarily repaid EUR70 million of debt since the end of our third-quarter 2015, with EUR20 million of the total transacted in January 2016, all as a part of our ongoing effort to deleverage our balance sheet.

Slide 5 illustrates the success of our strategy of focusing on carbon black specialties. Here we provide additional color on volume mix by business and geography, adjusted EBITDA by business, and some longer-term performance trends for these two businesses.

Referring to the pie charts, while our specialty carbon black business continued to account for roughly 20% of total volume in the fourth quarter of 2015, its adjusted EBITDA increased to 56% of the total, up from 42% in the prior year.

As evidenced by the bottom left graph on slide 5, our business model and ongoing initiatives have given us remarkably stable per-ton profits in both businesses, in spite of a very volatile energy market and some regional markets that have seen little to no growth. On the bottom center graph, we can see that the adjusted EBITDA margins in both our specialty and rubber carbon black businesses continue their long-term upwards trend, in part as a result of our ongoing shift to higher value-add products and general productivity improvements, as well as the impact of lower oil prices on our revenues. In our rubber carbon black business, we significantly increased the percentage of volume coming from technically unique rubber grades, including those sold to the mechanical rubber goods industry.

From a geographic standpoint, we are increasing our diversification. And while Europe and North America remain our largest regions, Asia-Pacific saw a step change in growth with the inclusion of our Chinese facility.

Let's turn to slide 6. Now, as much as I would like to start this discussion with our specialty carbon black business, with its increasingly exciting story of growth and profitability, I know many of you want to hear about our rubber carbon black business and the cost and pricing dynamics going on there first. So let us begin there this time.

You can see that it was another challenging quarter for this business. At the top line we were certainly pleased to have rubber carbon black volume increase by nearly 10% to 209.4 kilotons in the fourth quarter of 2015. Roughly 60% of the increase was a result of the completed purchase of the OECQ facility in China. Our volume growth was 3.6% without this purchase and was due to increased demand in Europe and, to a lesser extent, North America and South Africa, which was offset by weaker demand in South America.

Revenue declined by 24% to EUR168.9 million on lower oil prices and the resulting pass-through of feedstock costs to our customers. Gross profits also declined from EUR44 million to EUR39.8 million due to negative feedstock developments, which were somewhat offset by volume growth and favorable foreign-exchange translation effects. As anticipated, the differential pricing impact this quarter dropped by roughly half versus the EUR7.5 million hit we took in third quarter of 2015. But it still persists as a significant headwind for the business.

Although adjusted EBITDA in the rubber carbon black business also decreased this quarter, primarily due to lower gross profits as a result of the negative feedstock cost development, the adjusted EBITDA margin rose by 60 basis points to 13.3%. The increase in margin reflects the impact of lower oil prices on our revenues, increased volumes, and some additional progress on our productivity measures despite the unfavorable impact of lower oil prices on these measures.

This is one of the highest EBITDA margins we achieved within this business as a public company. Also worthy of note is that except for oil-price-driven revenue, every operating metric listed on slide 6, from volume down to adjusted EBITDA margin, represented a sequential improvement versus the figure reported in our third quarter of 2015.

The last time we talked, we touched on the 2016 contract negotiations which were underway with the major rubber customers. These are complete now, and I'm glad to say although the competitive environment was difficult, the outcome was in line with our expectations. We held positions within our regions that are expected to deliver growth consistent with expectations for each region's economy.

Overall base pricing was maintained. Due to the competitive nature of the discussions, we were not able to remedy the cost/pricing dynamics affecting our raw material pass-throughs at the time. I'll speak more about this shortly.

Now we'll move on to our specialty carbon black business. Turning to page 7, you'll see that this business had one of its best quarters ever, capping an outstanding year of performance that saw year-over-year gains in volume, adjusted EBITDA, and EBITDA margin in every quarter. Volume in the fourth quarter of 2015 increased 10.9% to 54.1 kilotons versus 48.8 kilotons in the prior-year period on strong gains in both Europe and Korea, which benefited from strong auto builds and good demand in those part of our markets.

We also have increased sales of our new products and products' extensions in these markets as we continued bolstering our sales and technical support throughout the globe. It's certainly gratifying to see these actions reflected in our numbers and know we are executing well against our strategic objectives.

Gross profit for specialty in the quarter rose to 32.9% to EUR38.6 million as our gross profit per ton increased by almost 20% as a result of leverage of increased volumes, favorable foreign-exchange translation benefits, and our ability to manage price effectively in light of lower feedstock costs. The resulting leverage allowed adjusted EBITDA for the specialty carbon black business to increase by 40.5% to EUR28.4 million in the fourth quarter of 2015 compared to EUR20.2 million in the prior year.

Our adjusted EBITDA margin also increased significantly to 31.1% from 21.3% in the prior year, reaching the record level achieved in our second quarter of 2015. The strength in adjusted EBITDA margin is clearly due to the leverage gains from these strong volumes, coupled with our disciplined approach to pricing in light of lower feedstock costs. Fixed costs were also well-managed.

I'll now turn the call over to Charles, who will begin with the overview of our consolidated performance.

Thanks, Jack, and let me also wish everyone a good morning. Turning to slide 8 and our consolidated Q4 results, as Jack stated, our volumes increased by 10.1% or 24,200 metric tons from the prior year to 263,500 metric tons. As was the case throughout 2015, we were able to grow volumes in both of our businesses in the quarter. And we remain optimistic that we have the proper growth initiatives in place and attractive end-market demand to do so in the future.

Revenue, in contrast, decreased this quarter by EUR56.4 million or 17.8% to EUR260.4 million from EUR316.8 million as we continued to experience sales price declines resulting from pass-through of feedstock costs, offset to a degree by foreign-exchange translation effects from a stronger US dollar and increased volumes. Strong performance in our specialty carbon black business produced a 6.5% gain in our overall contribution margin to EUR110.2 million in the fourth quarter of 2015 versus EUR103.5 million in the prior year's period.

As the waterfall chart on the right shows, volume and currency were positive factors in the quarter, while differentials and other factors, which include mix, were partially offsetting negatives. We delivered adjusted EBITDA of EUR50.9 million, a year-over-year increase of 4.9%, with an adjusted EBITDA margin of 19.5%, an increase of 420 basis points above last year's fourth quarter. As the waterfall chart on the right again shows, adjusted EBITDA was boosted by the contribution margin development, offset by foreign-exchange translation effects associated with our fixed-cost base. Lastly, our net income in the fourth-quarter 2015 was EUR1.5 million, up from the fourth-quarter 2014 loss of EUR8.3 million, with the most significant factors for this increase being related to our operating result, developments, and financing costs.

Turning to slide 9, I'd like to review with you our full-year cash flow and touch on a few balance sheet metrics. The first thing that should be apparent on the cash flow analysis on the left graph is that we continue to generate a lot of cash. All of 2015 we generated EUR214.4 million from operations, which includes a EUR44 million boost from a reduction in our working capital.

Our uses of this cash flow in the year included capital expenditures, interest payments, mandatory debt repayments, and our dividend, totaling EUR146.3 million, which resulted in free cash flow in 2015 of EUR68.1 million. This has afforded us ample flexibility for discretionary uses this year, which comprise the purchase of OECQ for EUR27.9 million, less acquired cash; and a voluntary debt repayment of EUR50 million. As a reminder, we repaid a further EUR20 million of debt in January of 2016.

Turning to our balance sheet, net working capital totaled EUR183 million as of December 31, 2015, compared to EUR188.9 million as of September 30, 2015; and to EUR219.7 million as of December 31, 2014. Days of net working capital of the end of the fourth quarter were 64 days, consistent with the end of the third quarter of 2015.

As of December 31, 2015, the Company had cash and cash equivalents of EUR65.3 million, which represents a decrease of EUR5.2 million versus December 31, 2014. The Company's indebtedness as of December 31, 2015, was EUR650.8 million. And our net indebtedness was EUR603.7 million, which represents a 2.89 times LTM EBITDA multiple. Our goal is to steadily reduce this multiple over the next several years with a combination of additional free cash flow and adjusted EBITDA development.

One footnote comment. As you refer to the total debt chart on the bottom right corner of this slide, one thing to keep in mind is that some of our debt is denominated in US dollars but is accounted for in euros, and thus gets revalued every quarter as these currencies fluctuate. So while our debt appears to have risen at times during 2015, increases were in fact accounting adjustments due to the changes in the strength of the US dollar.

Now I'd like to shift the discussion to 2016. On slide 10 we provide you with the macro assumptions we are using as recently provided by the IMF World Economic Outlook Database. With the exception of Brazil, our remaining markets are all expected to see moderate to good GDP growth in 2016. Similarly, assumptions for auto builds -- see slide 11 -- around the world are largely expected to track regional GDP growth.

Against this backdrop of reasonably steady economic activity in most geographies, we provide our 2016 adjusted EBITDA forecast on slide 12. Based on the volume growth, oil price, and contribution margin and exchange rate assumptions included on this slide, we currently see our full-year adjusted EBITDA ranging between EUR205 million and EUR225 million. In terms of other guidance metrics, we see capital expenditure spend in the range of EUR55 million to EUR60 million, depreciation and amortization combined at about EUR80 million, and we are projecting a 35% tax rate for 2016.

How might our ability to generate free cash flow and support our dividend fluctuate under different oil price scenarios? This is a question we're frequently asked, so I'd like to spend a few minutes on this topic.

On the top right-hand corner of slide 12, we detail in some of the components of our annual base business cash requirements. As you can see, we currently require slightly over EUR100 million per year to meet these base cash needs of our business.

Our cash flow from operations, which topped EUR214 million in 2015, is a function of our EBITDA and variances in working capital. Suffice to say we earn a healthy base level of EBITDA for the total Group, which historically has varied around fairly tight windows, given in part the stability we've demonstrated in our per-ton gross profits, notwithstanding comparatively large percentage swings in the price of oil due to our ability to generally pass through changes in feedstock costs.

Moreover, the incremental changes in our working capital needs are actually inversely correlated with changes in the price of oil as rising input costs and product prices increase our current assets and falling costs do the opposite.

The working capital offset is a temporary one, however, which is why Jack was really reviewing with you additional actions we can take to address prolonged oil price weakness. My point in a nutshell is that we believe we have ample flexibility to pay our regular future dividends, invest in expansion of CapEx as needed, and voluntarily pay down additional outstanding debt.

I will now turn the call back to Jack, who will provide some comments on operational priorities for 2016 and discuss our potential responses to ongoing oil price deflation.

Thank you, Charles. I'm now on slide 13, where I would like to spend some time discussing our 2016 operational priorities. As you can see, we have another full slate of actionable items which we intend to implement over the course of this year.

At the top of our list is driving stronger growth of higher value-added technical carbon black grades as we continue to dedicate more of our capacity to technically unique materials. We will do this in several ways: first and foremost, by building further momentum in our already successful specialty carbon black business through the expanded production of a number of selected grades. We will also look to increase the mix of specialty and technical rubber grade products at our Chinese production facility.

Finally, we will continue to build strength in our sales and technical support teams in both our traditionally strongest regions, but especially in emerging markets, where we have yet to achieve the share targets we believe are possible based on our widely recognized best-in-class technical capabilities. Specifically regarding our rubber black business, we will be working to boost our adjusted EBITDA through a number of productivity and efficiency improvements as well as expanding the percentage of volume coming from higher value-added rubber grades.

Of course, our rubber business continues to suffer from the imbalance between its feedstock costs and product pricing, and we will continue to actively address this problem in a number of ways. We will make investments during the year that will support our capacity expansion and efficiency improvement plans while concurrently evaluating our global production footprint to further identify redundant or extraneous costs.

Finally, we will continue to work with our customers and potential customers to expand our product lines, with development such as unique rubber grades that offer better performance and attributes, like tread wear and fuel economy. Our efforts in manufacturing technology will continue focusing on improved efficiency, in spite of a lower oil cost environment, and improvements in product quality and consistency.

And we will remain a safe and healthy place to work. One where, for instance, in 2015 not a single workday was lost due to a work-related injury.

The last slide I have for you today, slide 14, presents a list of levers to pull in response to this persistently low oil price environment. These responses are above and beyond the 2016 operational priorities actively being addressed on slide 14 and represent actions we may take -- and, in some instances, have already initiated.

While we know how to run our business very well, there are many factors that simply remain beyond our control. And we want to be prepared to act against them. We are committed to doing everything we can to maintain or even expand our profitability, regardless of the economic environment.

This list is divided into cost and production responses, and I'd like to make a few remarks about each category. On the variable costs side, we are taking steps to address the imbalances in our formula pricing, focusing on the disconnect which has occurred between the indices on which we purchase feedstock and the basis used for our product sales price.

From the usage standpoint, we're also taking steps to reconfigure the efficiency of the existing supply programs. Lastly, we have the option of increasing our flexibility or using a wider range of feedstocks.

In terms of production, we have the ability to shift some of our production capacity to higher value-add, more profitable specialty and technical grades. In a similar vein, we are reviewing opportunities rationalize lower-value rubber grades that become profitable in this time of oil price deflation, allowing us to implement fixed cost reduction in selected geographies.

We want you to know that we are very proactive in addressing this challenging environment, with the goal of maximizing our returns and cash flow and growing our market leading position in specialty black. In closing, we continue to be optimistic about our ability to profitably grow our volumes and both of our businesses. Our specialty carbon black business continues to be a major engine of growth and profitability improvement, driven by its industry innovation and leadership.

In our rubber carbon black business we expect some of the same headwinds we faced in 2015, but we will maintain our respective shares in the regions that we serve. Most importantly, we are confident that we have the right team and strategy in place for continued success over the coming years. In closing, we wish to thank our investors for their confidence in Orion and all of our employees for their hard work during this past quarter and year.

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

(Operator Instructions) Eugene Fedotoff, KeyBanc Capital Markets.

First, I guess, on your guidance for 2016, just wondering if you can provide a little bit more color on the assumptions behind lower end versus high end of the guidance.

Hi, Eugene, morning. It's Charles here. Yes, Eugene, the bottom line is we look into 2016 in the environment we described just a few minutes ago, it is one that makes assumptions about oil price. We've seen what oil prices have done over the last very few weeks and, indeed, for the -- particularly in the second half of last year. And the range of the guidance for next year very much taking into account we can't predict oil prices; we'll be at the higher end of that range if oil prices stabilize and start to move up. And if they go down a bit, we're going to be towards the midpoint of the lower end.

We think it's appropriate at the start of the year to have a broad range and then to narrow it down as the year continues. But we look into next year from a specialty point of view optimistically, as Jack has already said. We think and believe and expect to be able to continue to move that business forward, as we did in 2015. And we've got a lot of actions lined up, as Jack also announced, for the rubber business, which we expect to take hold and drive us towards the midpoint or higher of that guidance. So those are the factors, really. The oil market stabilizing, moving up a bit; and the many actions that we've got lined up, some of which we've already implemented -- the payback in those actions will drive us towards the higher end.

Thanks for this color. And just to follow up on the revenue expectations you were guiding for -- sorry, [revenue] growth of in line with GDP. Would it be fair to assume that your specialty business will continue to grow at a multiple of GDP, and rubber black business will be sort of flattish to maybe up slightly?

Eugene, that's where we've been in the past. We've grown, for the most part, our rubber business consistent with GDPs in the operating regions where they exist. Our specialty business has outgrown GDP in those regions -- or, rather, globally, so to speak. So we have every reason to believe we'll continue on that trend in 2016.

Okay, got it. And do you mind maybe providing some numbers around at the operating efficiencies benefits in 2016? I understand that there's some more focus on that this year. Do you have a number that you're targeting?

There is more focus; I mean, there has been focus in the past, but we see additional opportunities. The point in a nutshell though, Eugene, is that it's a function of oil price. I mean, if you -- if oil prices go up, the value of saving on, for example, feedstocks, the efficiency programs associated with that rise as well. And the converse takes place lower oil prices.

So it wouldn't be a number; it would be a range. And that range certainly encompasses us improving on efficiencies we achieved in 2015. As we said already, and we are already implementing, we have an array of actions designed in a low oil price environment to give us a boost on the efficiency front.

Got it. And just the last question: it seems that according to your expectations, cash flow generation should remain strong this year and probably in line with 2015. Do you expect to -- as far as uses of cash, do you expect to obviously pay the dividend, but pay that probably at the same rate you did in 2015?

2015 benefited, as I called out a little bit earlier, by about EUR44 million of working capital reduction as oil prices came down. I'm not here to predict oil prices, but it's not reasonable to expect they are going to come down to that extent for mechanical reasons about where they already are.

The fact of the matter is, though, that we expect to continue to be highly cash generative. And as I said a little bit earlier, the uses that cash are very clear. The dividend is absolutely something we're committed to. We want to invest in it -- CapEx, expansion CapEx, efficiency CapEx, as we've outlined previously, and as we've done previously. And then we want to pay down debt. Those are the clear and earmarked uses of our cash.

Thank you very much.

John Roberts, UBS.

Is the rubber black price spread relative to the benchmark oils stable, and 100% of the issue here is the basis differential between your cost and the benchmark oils?

Mostly, John. I mean, that's what we fought at the end of last year. We talked extensively about the basis differential between the indices by which we buy the oil and the product sales price, which are geared off the same indices. And those bases, quite frankly have broken out in this market for a variety of different reasons.

And it changes from region to region; it changes from material to material. Some of the arbitrage opportunities we have had in the past between different types of raw materials are no longer existing, and some of the, call it, the fixed charges that exist with some of these materials have loomed and gotten much larger than they have in the past, just because of the absolute size of oil -- of certain freight charge, for instance, just by example, on $50 or $60 oil is not as impactful as it is what it's $20, just without getting into the intricacies of the formula. So that's the large driver that we're fighting with right now.

Understood. And if I look at slide 8 in the waterfall, Charles --.

John, let me just touch on one of other thing, because I think it's likely to come up. And I think it's in keeping with what Eugene said or perhaps where you're going as well.

There is also the issue that -- you know, and most people on this phone know, that we're pretty large exporters of energy. And to the extent the energy prices fall, we see a decline in contribution from energy as well. So a lot of the initiatives that we put in place were geared towards saving our raw materials and variable costs in an oil environment which was higher than it is today. That doesn't mean that we're not still saving money on that; we're just not saving quite to the extent we were in the past.

And to the extent we sell energy, which we do in many of the locations -- in fact, all of our regions, the income from those are not as high as they were, just simply because of the lower price of energy which exists in the world market today. So, I mean, that's a headwind for us, too, that you probably are aware of. But I would just like to point it out, in keeping with what you asked earlier.

Sure. You're talking about the cogen credits?

Yes. That's -- the latter part of the comment was with respect to cogen credits. The earlier part was the expectations of productivity gains and efficiency gains, which differ in a $60 oil regime and a $30 oil regime.

Yes, understood. And then on slide 8's waterfalls, there's a EUR3.6 million differential. The rubber black EBITDA was down by a lot more than that amount in spite of the 10% higher volume. So that differential obviously is more than just this rubber black/raw material basis issue. Could you give us a little bit of sense of what's in that differential? Obviously, there's a much larger basis headwind that you talked about in rubber black, offset by other things.

We were just calling out there, John, the difference in differential between Q4 of last year -- Q4 of 2014 and Q4 of 2015. That's what that number is. There are other factors. Bear in mind that this is for the Company as a whole, this chart; it's not just for rubber black. So you've got -- in that waterfall you've got the offset of the specialty business, and you've got some mix factors, both product and regional mix factors that are included in other.

Okay, thank you.

Kevin Hocevar, Northcoast Research.

Wondered if you could update us on if the differentials kind of stay at levels that they are at today, what the impact would be in your -- to EBITDA in 2016. Would it be neutral, would it be a headwind, tailwind, what have you? And I guess -- do you have a range or anything you could give us for what's baked into the high end and low end of -- you know, based on where that differential might go?

Yes. In terms of the comparison of the guidance for 2016 versus 2015, we expect differentials based upon the assumptions, obviously, we've made right now to be at about half the level of -- the negative differentials to be at around half the level of what they were last year, roughly. In other words, that would be -- from a differential point of view that would be a pickup, a tailwind, roughly.

The accuracy of that comment is factored into the breadth of the guidance. That's one point. The second point I'd like to make, and it touches, Kevin, on what Jack was referring to a few minutes ago when he was answering the question from John, and that is that we've got a number of other factors that we are dealing with at these very low oil prices -- whether they are reduced payback from our efficiency programs, and, as we said, were designed originally to pay back when oil was a lot higher; and also, we're seeing some of the savings we've achieved in the past through using different types of feedstocks, oil-based versus coal-based feedstocks in certain locations. So those savings have, frankly, dried up in some cases as there's been a complete realignment of the feedstock market.

And then the final point I would make, and this is also baked into the range of our guidance, and in part why it's so broad, is that we -- in specific situations with specific customers, some of our pricing arrangements, formula arrangements aren't really designed -- were never designed to function efficiently, from our point of view, at these very low oil prices. And those are some of the points we are -- you know, as Jack outlined earlier on this call, we are in the process of addressing. And again, that's baked into the range, the success we have in doing that.

Got you. And with that -- I guess with the formula-based pricing, trying to balance feedstock with the end price, is that something that you think Orion can do on its own? Or does the industry need to -- as a whole need to change the pricing to have success there?

Kevin, it's a good question, but you know it's one I can't answer. We will pursue our pricing approach in the addressing of the imbalance between these costs and prices as we see fit. What the rest of the guys do is up to them.

Yes, got you. Okay. And then with where we're at -- we are about two months into the quarter -- wondering if you could give us an update on how things are trending. And also, I think the first quarter is a more difficult comp. I don't think differentials had really hit you yet to any major degree. And FX, I believe, was pretty favorable. So just wondering how you see things trending thus far in the quarter?

What we see, actually, Kevin, is exactly what you have alluded to. As 2016 unfolds, we expect, certainly in terms of comparison to the quarters in 2015, to pick up. So we're going to see a more favorable comparison to 2015 and 2016 in the later quarters. And in the earlier quarters, one and two to some extent, for the reasons you outlined, we're going to see the reverse. So as the year unfolds, we expect to develop momentum in terms of the results of this business 2016 plays 2015.

Got you.

Just adding a little color to that, Kevin: we started off the year, I think, pretty much on track, the specialty business showing the same type of brilliant performance it has in the past. January can always be kind of a bit of an odd month, because you've got some lane shifts going on and that type of thing. But that seems to be settling out right now. I would say that generally speaking, the demand level that we see in the different regions around the world are pretty much where we expected them to be.

Okay, great. And then final question: I noticed in the footnotes of your press release, you spent EUR5 million related to addressing the EPA enforcement in the US. So wondering if you have any update there that you can provide?

I can only comment, I guess, sort of like we said in the past; we continue to be in active negotiations currently with the EPA as well as the indemnifier for those claims. We seem to be making continual progress in that regard. But I'm really not at liberty to go any further than that, Kevin.

Sure, no problem. Okay. Thanks very much.

Thank you.

(Operator Instructions) Chris Kapsch, BB&T Capital Markets.

Good morning, and I just wanted to thank you for the comprehensive disclosure in your commentary this morning. I did have a follow-up on the differential discussion as it relates to your guidance for 2016. If I understood what you said, you expect currently, as baked into your guidance, half the differential -- so, therefore, effectively a tailwind in 2016. But I'm curious how it looked sequentially or how it looked so far sequentially in the first quarter versus the fourth quarter, if you could comment on that?

We are not done with the first quarter yet, obviously, Chris -- and by the way, good morning -- but basically, at a similar level so far to where we ended up in Q4 of 2015. Although we are, I think it's fair to say, starting to see a little bit of pickup in differentials as we look into Q2 for a variety of reasons, in one region in particular.

So that's the view right now. The only other thing I'd point out, Chris, is there is a lag between when we buy the oil -- when we commit to buy the oil and when we actually work it through our inventory and sell the product at the other end. So that does sort of make it quite difficult to be particularly precise by month and by quarter when it hits our P&L.

Yes, and Chris, just adding to that a little bit, what we said we thought differentials were going to do leading into the start of 2016 is what happened, because we had pretty good visibility is what it appeared. But as Charles said, we're beginning to see some strengthening of those differentials right now into the second quarter as we are planning tenders in the second quarter. So thus, we're a little -- I guess a little cautious about how we gear our expectations based on how that's moving.

But having said that, I'd just like to emphasize the fact that while we have seen some abatement in that particular differential issue, it's still a significant headwind. And there's still a significant disconnect between the price we buy and the price we sell at, which has to be addressed during this year.

Right, okay. Got it. And then following up on your comments tied to page 14 in your presentation, the deck, you talked about a number of levers that you feel can help improve the cost situation against this sort of backdrop of the differential issue. And just wondering -- somebody asked to try to get at a magnitude of the potential benefit from these. I'm wondering if, in fact, any benefit is baked into your 2016 guidance? And if so, what's that amount?

And then specifically on the effort to diversify your feedstock as a means of addressing this disconnect in differentials: can you adequately shift around feedstocks without having some sort of adverse effect on your production yields, or your quality, or your capacity? Do you have any insights into that at this juncture?

We have a pretty sophisticated feedstock analysis program -- approval processes and things that we go through. And where we would make changes in feedstock, they are always made in view of what impact it might have on capacity, particularly quality, and a number of other factors which enter into the game. So as we would shift them around, we would be always conscious of that.

But the additional flexibility that we speak of here has a lot to do with taking other types of supplies that just the capital, or the infrastructure, or the facilities in our plants right now don't have. And in times where there was potentially these arbitrage opportunities that I mentioned a bit earlier -- when those existed, these weren't as critical a need as they are today.

But with the differentials where they are, and the need to do this, then we step in and we begin to reconfigure, do some CapEx spending, some -- call it some additional plumbing in our facility, so that we can use these. But in terms of an outside-in look on capacity or our ability to produce certain types of premium products, no, there would not be an impact on that.

And to your question, Chris, about how much of the topics on page 14 are baked into the guidance: to get above the midpoint of the guidance, we're going to need to realize some of these. And as we note, several critical initiatives have already been initiated. So to get above or beyond even that midpoint, to the higher end of the guidance and beyond, we're going to need to deliver some of this. And that's why we have already started.

I see. And then, if I could, just one final question on the balance sheet. And as we have talked about in the past, you guys -- the decision to strategically bring down or pay down some debt and deleverage a little bit, partly a function of how punitive the capital markets have been towards companies with perceived leverage. So given the little bit of a shift there, and your ability to comfortably delever as you both grow your EBITDA and generate cash, what's the new target that you have? What makes sense for a company with your profile and your cash generative characteristics? Thanks.

I mean, just to reiterate before I directly answer your question: cash use -- one is dividend; two, expansion CapEx and efficiency programs; three, paying down debt. In terms of what our target is: to get around to the mid-2s in the medium term, 2.5 times leverage through a combination of debt paydown and EBITDA improvement.

You know, our interest burden has come down significantly with the paydown of EUR70 million of debt that we did around the end of last year. So that is now around about EUR32 million, EUR33 million a year, which is compared to our EBITDA and cash generation, which isn't a huge burden. But in terms of that measurement of leverage, net debt to LTM adjusted EBITDA, take your point. And that's why we want to bring it down into the mid-2s.

Got it, thank you.

Charlie Webb, Morgan Stanley.

Thank you very much for taking my questions. Just two, if I may. Firstly, with the completion of the OECQ acquisition, can you talk us through your intention and timeline to expand specialty and technical grade production? And how are the current demands of these grades currently looks in China today?

That particular facility has been directed towards specialty rubber. We call it MRG or the mechanical rubber goods business. It is a premier supplier of that particular material in China.

And thus, it's been able to stay reasonably stable in that market because OE and car build in China, while it's not quite as heady is it used to be, they still build north of 20 million cars a year. And they have become more and more premium. And so the demand for those materials are quite high. There is some other materials made in that facility, and we will work with our technicians to continue to move more of its capacity to that particular MRG material supplying that OE market.

At the same time, it in former times was a producer to some of the coatings and printing ink businesses in China. It still does a little bit of that. But given the distance between the facility at the time it was in limbo and now, they sort of lost track of those areas, lost technical support -- which we have a significant amount in Shanghai and Asia-Pacific as well as globally.

So we'll begin to direct it also to some of these areas where we can penetrate back into some of the printing industry, some of the higher-end printing industry as well as finally into some of the polymer masterbatch which exists there. We are, as you probably know, a premier supplier of very high-end specialty blacks into China produced outside of China. But to be competitive in some of the markets that I just described, we needed a production footprint in China, which we have now.

So the lines that we've got there -- we've always had a notion, the strategy has been to direct as much of it as possible to the OE MRG area, particularly for the premium end, and these areas of specialty carbon black that require what I would call regional supply, as we now have with Qingdao.

I mean, that's the plan right now. And you asked about timeline: well, it's clearly underway right now. That's what our technicians, our marketing people are working on as we speak.

Very helpful. And kind of a little bit of a follow-up to that: could you give us maybe a bit of color of plant utilization by region -- maybe Europe, North America, and then Asia -- what you're seeing currently today, given the volume growth you have seen kind of this year, 2015, sorry, versus 2014 and looking at the run rate going into 2016?

Yes, this sort of generally speaking may be kind of a picture of the last few months and where we see going forward right now. I would say US mid-80s. Maybe some guys -- and I'm talking about ours. I won't speak to the industry.

Sure, yes.

My sense is mid-to-high 80s or so. Europe is tight, very tight, interestingly enough. We see -- probably the tightest markets we have right now are there. We are full for the most part in Korea; that's a very tight market right now.

China, I would call it -- our new facility there is operating probably I think right now in the low 80s, but that's simply because of the need to gear up to do what we're talking about right now. The notion is we would be operating at a higher capacity rate than that going forward.

South Africa -- reasonably operating, like last year, in the mid-80s, mid- to low 80s, which is okay, because they're the only supplier there and essentially are the supplier for the rubber industry in South Africa. Brazil remains sort of the weak link, just simply because of the economy down there. I'm going to put it probably the lowest of the utilization rates.

Okay, perfect, thank you very much.

Jeff Zekauskas, JPMorgan.

Thanks very much. Could you talk about your net financing costs for 2016? Would they differ very much from 2015?

Morning, Jeff. Net financing costs we expect to be EUR32 million, EUR33 million of interest cost. Also in our P&L --because we have talked about it actually a little bit earlier when I was going through some prepared remarks -- as you recall, we have a portion of our debt, roughly half, that's denominated in US dollars that gets revalued; some portion of which, which is not hedged, gets revalued through our P&L. So that can, depending on what happens to FX, can impact the overall financing cost. It's a non-cash item. So I think the cash interest expense, EUR32 million, EUR33 million for 2016.

Okay. Secondly, your tax rate will step up for next year. Why is that?

No, we expect our tax rate to be 35%, which is guidance we've given since last three years. We had a tax rate this year of just a bit over 35%, actually.

I see. So your adjusted tax rate was 35% this year?

Yes, it was 35.7%, I believe. Yes.

Okay, great. When you look at your specialty black volumes, do you think you're growing at the rate of the overall market? Or do you think you're growing faster or slower?

You know, Jeff, we track as well as we can what we think the growth of the specialty black markets are around the world. In our view, and in the view of third-parties that do the same thing, we've outpaced the specialty black growth every year since we've been Orion.

So how have you done that? Is it from a particular application, or a particular region, or a low-cost position? Can you speak in a little bit more detail about how you've done that?

It's not a cost issue; I think I can set that one aside right now. I think it's a focus, it's a technology, it's an increase in our sales staff, it's a penetration of markets where we did not really exist in the past. There was within -- in the prior days a focus on the traditional markets of Europe, to some extent: the Koreans taking care of Korea, and the US, and so forth.

And now we have placed a lot of additional people in markets where we had no offices in the past. And that has proven to be very good. And in addition to that, we found what I would consider a couple of really nice veins of opportunity which fall into -- for instance, the apparel market in China, where we've got a material that's doing very well for us in that, and that has been reasonably stable market for China.

Infrastructure business in Korea, which is probably more export-oriented, has been very strong for us. And we have been able to participate in that as well.

And the US, I mean, we probably did not have in prior days, say, four or five years ago, the level of, I guess, technical talent to support the penetration of these markets. And we put those in place now, in addition to the people that I mentioned earlier in such areas as South Africa, South America, Southeast Asia, Thailand, and so forth. So I just call it kind of a all-out effort of product development, product extensions, product support, and focus.

Okay. And then lastly, do you expect that measure of growth above the market to continue in 2016? Or probably we would go back to a more normalized level closer to the market, right?

We think we can continue the trends, yes.

Okay, great. Thank you so much.

(Operator Instructions) John Roberts, UBS.

Thank you. In the specialty blacks profit improvement, is there a way to think about how much of that is the lag benefit between price and raws, and how long it would take for that to unwind?

There is a piece of that, John. But bear in mind that around about half of our specialty business is not -- it doesn't have any price adjustment. And our customers, as Jack outlined earlier, are focused on the value our products bring.

I think, also, the final thing I'd say in response to your question is: it's a function of whether oil prices sort of stay at a particular level or keep jumping around. And given that we can't predict that -- it's very difficult to predict if there's some earnings that we should expect to drift away over time -- the reality is, actually, that oil prices in that -- they're always moving. And the customers who don't -- aren't on an index adjustment are actually focused on the value we bring leads us to conclude that there isn't a particular leakage here.

Thank you.

Chris Kapsch, BB&T Capital Markets.

My question was on the specialty business, but it had been answered already. Thank you very much. I appreciate it.

You're welcome, Chris.

Jeff Zekauskas, JPMorgan.

Thanks. Just one last thing. How much do you think your EBIT or EBITDA improved in 2015 from currency effects?

2015 plays 2014?

Yes, that is for the entire year.

We have that. Bear with me one sec. Let me dig around.

Quarter number, not full year.

I've got the full-year here, actually. In terms of EBITDA, just let me try to do a bit of swift mental arithmetic here, Jeff. Around about EUR15 million or so, Jeff, a bit less, EUR14 million, if I take full-year 2014 versus full-year 2015 adjusted.

That's the way we calculated it, too. We appreciate that.

Not at all.

Thank you. Mr. Clem, there are no further questions at this time. I will turn the floor back to you for any final concluding remarks.

All right. Well, thank you for joining us today. We had some really great questions from all of you. Appreciate you taking the time to join us for this discussion.

I guess I'm particularly pleased to hear the questions about the specialties business, because you know we're quite bullish on that business. It's been a strong driver of growth for us. It's been -- had just really astonishing success, success that we'll continue to see grow as we go forward. So I really appreciate the questions about that, because I feel like I spend a lot of time talking about the rubber business, when it's the specialty business which I think deserves a lot of credit for what it's done.

Having said that, I would comment that I trust that you heard us today about the rubber business. It's in an environment right now which is difficult; it's got headwinds from last year that continue into this year, and some truly -- just some sort of structural issues that are going on right now that need to be addressed. And I hope you recognize it.

We are taking a pretty proactive approach towards doing what we can to address this imbalance between cost and price from our material and looking very hard at the production network that we have within our systems to see where, because of this price dislocation, what we can do to walk away from some of the business that doesn't make any sense, or at least push it to more higher-margin materials. And if it requires us to do so, to deal with the fixed costs that are associated with that.

I hope the two points of this discussion have been very clear and just to recap that, great performance last year 2015 for the specialty guys. Expectations much the same in 2016. A difficult time for rubber, but a good team in place and good plans in place, and some very key initiatives underway right now to address what we consider the structural difficulties of that.

So having said that, thank you very much again. We appreciate your time, and we'll close the call at this point. Thank you.

Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.