Orion SA (OEC) 2016 Q2 法說會逐字稿

Greetings and welcome to the Orion Engineered Carbons second-quarter 2016 earnings conference call. (Operator Instructions) A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ms. Diana Downey, Vice President, Finance and Investor Relations for Orion. Thank you. You may begin.

Thank you Operator. Good morning everyone, and welcome to Orion Engineered Carbons conference call to discuss second-quarter 2016 financial results. I'm 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 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 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, August 5th, 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?

Thank you Diana. Good morning and thank you for joining us today for our second-quarter 2016 earnings conference call.

Our agenda today is shown on slide 3. I will be providing highlights from the second quarter of this year and comments on the performance of our two Carbon Black businesses. I will then turn the call over to our Chief Financial Officer Charles Herlinger, who will provide more detail on our financial results and discuss our outlook for 2016. After Charles has finished, I will return to make a few comments on our outlook and priorities for the rest of the year, and then we will open the lines to take your questions.

Referring to slide 4, we delivered record profitability for the quarter in spite of some turbulence in the market and the headwind we faced in this low oil price environment. We grew volumes in both businesses at stronger than market rates. Excluding the recent acquisition in China, our organic growth outpaced our view of the market growth rate with especially stronger than anticipated demand in Europe.

Cash flow generated from operations remained robust. Our Specialty Carbon Black business had record results and our Rubber Carbon Black business managed a tough market relatively well. Results demonstrate that our strategy of expanding our portfolio of high value and more profitable Carbon Black products while growing with the market continues to work.

We grew volume by approximately 12%, marking the third consecutive quarter of double-digit growth for Orion. Organic growth in the second quarter, that is excluding the sales volume from the Chinese business we purchased last year, totaled 6.5%, well above the estimate for the industry during this quarter.

Adjusted EBITDA rose 3.2% to an impressive EUR57.7 million in the quarter from EUR56 million in the prior year second quarter. This is our third consecutive quarter of both sequential and year-over-year growth. Adjusted EBITDA margin for the business rose to 23.3%, reflecting the overall strength of our business model.

Finally, adjusted earnings per share rose EUR0.01 as well, or about 3% to EUR0.35 per share while earnings per share rose EUR0.04 to EUR0.28 per share. As you will see shortly, this strong performance was driven particularly by an outstanding quarter by our Specialty Carbon Black business following a similar great first-quarter performance from that Group.

Slide 5 provides you some detail on our volume mix by both business and geography, adjusted EBITDA of our business, and two key profitability trend lines for our two businesses. We also comment in the footnote on progress with improving our mix of technical grade rubber products, that is those products that require special technology or support to be successful in the marketplace and which in turn carry high margins.

From these charts, you can see that our Specialty Carbon Black volume as a percent of the total rose quarter over quarter to almost 22%. Adjusted EBITDA per specialty continues to rise as a percentage of the total, increasing to 67% of overall adjusted EBITDA at all-time high versus 54% in the prior year on a combination of strong results for specialty and weaker results in rubber.

We are increasing our sales on high-margin grades in both specialty and rubber as we focus on improving our overall mix. This focus on higher margin grade is a key performance metric for our business as we monitor the success of our efforts to expand these more profitable grades.

Our gross profit per ton and adjusted EBITDA margin per quarter are also shown on this chart. As you can see, our Specialty Carbon Black business continues to grow not only in volume, but also in the quality of the products, moving up gross profit per ton over time, boosting adjusted EBITDA profitability and margin. This is a clear result of our ongoing strategic initiatives to ship the higher value-add products supported by significant increase in our technical sales force in unrepresented regions and stamping up of our product and marketing support capabilities around the globe.

For the Carbon Black, gross profits per ton have been pressured for a number of quarters by challenging feedstock pricing environment, a situation that (inaudible) coming this year as a result of surcharges in Europe. Nevertheless, the business has maintained a relatively stable adjusted EBITDA margin because of lower oil prices impacting reported revenues, and the shift to advance grades which compensated for the decline in adjusted EBITDA. Our production volumes remain both well-diversified and in line with regional demand.

Slide 6 gives you more detail on our Rubber Carbon Black business. The environment for this business was challenging in this quarter as well as in the first quarter of 2016. The upturn in oil prices at the beginning of February did not address the full imbalance that occurred when oil prices fell from their high point in 2015. The impact on feedstock differentials required us to seek and achieve surcharges in Europe where this impact has been most dramatic.

In addition, it prompted an immediate review of our European production network in order to improve performance resulting in our recent announcement to engage the French subsidiary in discussions regarding a potential closure of the facility. These discussions are under way and we will inform you of any changes on this matter as they develop. This development underscores the importance of focusing the rubber business towards MRG and technical tire products devoting capacities at higher margin grades more consistent with Orion's advanced capabilities.

Volumes increased 11.3% to 229 kilotons in the second quarter as a result of the acquisition of the Chinese business which provided nearly two-thirds of the growth in the quarter. But in addition, European growth was stronger than anticipated, given the headlines about economic activity in the EU. Absent to contribution from China, volumes would have grown at slightly under 4%, a level still somewhat better than projected worldwide GDP growth for the period and consistent with our strategy to maintain or exceed the pace of the market.

European demand this quarter was fueled by robust autobuild and a recovering sales of replacement tires. Combined sales in the remaining region were down as some volumes were shifted to rubber -- from rubber to Specialty Black sales to supply strengthening demand from that segment and we experienced some weakness in replacement tire demand in certain regions.

Revenue declined by 19.4% to EUR149.9 million on lower oil prices and the resulting pass-through of lower feedstock cost to our customers. Gross profits declined, falling from EUR45.1 million to EUR38.1 million due to negative feedstock impact and to a lesser degree unfavorable foreign exchange translation effects, as well as an increase in depreciation. These were partially offset by our sales in China.

The differential (inaudible) impact in the second quarter remained a meaningful headwind for us amounting to EUR2.2 million, only slightly better than the EUR2.9 million impact seen in the first quarter of 2016. Looking ahead, the differential impact should lessen as imbalances in the oil market correct themselves, although the timing remains somewhat unpredictable.

Adjusted EBITDA on Rubber Carbon Black business decreased this quarter as a result of these impacts dropping 26.5% to EUR19.1 million. Adjusted EBITDA margin decreased to 120 -- decreased 120 basis points to 12.7%. Although this has been a tough first half for rubber, we are more optimistic regarding the second half of the year for a number of reasons. Surcharges in Europe were implemented during the second quarter and will come into full effect in the second half of 2016.

Russian and Chinese Carbon Black imports into our markets have declined alleviating strong competitive pressure. We also had several variable cost savings initiatives that were initiated earlier this year to offset raw material cost impacts, which will begin to show effect in the coming quarters. Volume should be stable.

Additionally, as we recently announced, we are engaged in discussions which could result in the closure of the plant we have in France thereby pushing our production network to a more efficient state. If these discussions lead to such a decision, it will represent another important step in our efforts to concentrate our resources at more efficient facilities and devote our capacity to higher margins products in both specialties and rubber.

Specialties had an outstanding record-setting quarter. This business had its best quarter ever of practically every critical metric. Volumes in the quarter increased 15.9% to a record 63.4 kilotons versus 54.7 kilotons in the prior year with gains occurring at all geographic regions in practically all sub-segments of the business.

Growth in Asia-Pacific continue to be particularly robust, offering proof that our ongoing global investments to boost our sales in technical support and drive increased sales on our new products and product extensions are paying dividends. Revenue increased modestly gaining 1.6% to EUR98 million a strong volume growth more than fully offset the negative impact from price declines resulting from feedstock cost pass-through.

Gross profit for specialty in the quarter rose 21.2% to EUR48.8 million as our gross profit per ton increased 4.6% to EUR769.8 per ton. This performance results from our excellent volume growth, along with margin improvements from strong sales for our premium products and our ability to maintain pricing despite lower feedstock costs.

Our leverage produced by the collective performance for these metrics resulted in adjusted EBITDA of a record EUR38.7 million compared to EUR30 million in the prior year's quarter. I think it's worth pointing out again that specialty, our fastest-growing and more profitable business is now accounting for over two-thirds of our adjusted EBITDA.

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

Thanks Jack. Let met also wish everyone a good morning. Turning to slide 8 and our consolidated second-quarter results, as Jack stated, our volumes increased by 12.2% or 31,900 metric tons from the prior year to 292,400 metric tons. Faced with sales price declines resulting from the pass-through of lower feedstock costs, our revenue this quarter was EUR247.9 million compared to EUR282.3 million last year.

Our overall contribution margin increased 5.4% to EUR121.4 million in the second quarter of 2016 versus EUR115.2 million in the prior year's period, driven by the very strong growth performance of our Specialty Carbon Black business.

As the top waterfall chart on the right-hand side of the slide shows, the improvement in contribution margin was driven by volume growth which more than offset headwinds in both differentials in currency. Referring to the second waterfall chart, the contribution margin improvement we realized in the quarter was a primary factor driving the adjusted EBITDA growth of 3.2% to EUR57.7 million and an impressive adjusted EBITDA margin of 23.3%, which represented an increase of 350 basis points above last year's second quarter reflecting strong operational performance, but also the impact of lower feedstock costs on our reported revenues.

Lastly, our net income in the second quarter of 2016 was EUR16.5 million or 13.1% increase from EUR14.6 million in the prior year's quarter. The final waterfall chart on slide 8 illustrates adjusted EBITDA growth and lower financing costs were the main drivers in this regard.

Let's turn to slide 9 which reviews our year-to-date cash flow dynamics as well as covers our key balance sheet metrics. As we've continued to demonstrate over many quarters, our business is a strong cash flow generator. In the first half of 2016, we generated EUR102.8 million from operations.

Our uses of cash flow this quarter, which includes capital expenditures, interest payments, required debt repayments and dividends totaled EUR79.8 million giving us available free cash flow of EUR23 million, which provided us with ample flexibility to voluntarily repay debt of EUR20 million and repurchase approximately 300,000 shares of our stock in the first half of 2016. An additional voluntary debt repayment of EUR20 million was effected in July 2016, subsequent to the close of the second quarter.

Turning to our balance sheet, our net working capital totaled EUR181.4 million as of June 30th, 2016 compared to a EUR183 million as of December 31st, 2015. Days of net working capital at the end of the second quarter was 66 days.

As of June 30th, 2016, the Company had cash and cash equivalent of EUR64.9 million compared to EUR65.3 million versus December 31st, 2015. The Company's non-current indebtedness as of June 30th, 2016 was EUR622.6 million with net indebtedness of EUR574.6 million which represents a 2.73 times LTM EBITDA multiple. Our current goal remains to steadily reduce this multiple over the next several years through adjusted EBITDA growth and deleveraging.

As a reminder, the total debt chart on the bottom right-hand corner of this slide is designed to illustrate the fact that some of our debt is denominated in US dollars, but reported in euros and that gets revalued every quarter as these currencies fluctuate.

Let's move on to slide 10 which presents our current full-year guidance and some cash flow analysis. On the negative side although we have seen oil prices recover somewhat since February, they have yet to realize any meaningful benefit in our rubber business as feedstock differentials have remained a persistent and significant headwind for us.

On the positive side, we remain very much committed to achieving pricing in the rubber business that adequately compensates us for the value we provide both by way of prices surcharges during this year, and price increases as we renegotiate contracts for 2017.

The performance of our specialty business remains very positive, driven by quality volume growth fueled both by our investments in technical sales capability and our product portfolio. Based on the overall encouraging progress our business as a whole made during the first half of 2016, as well as our expectations for both our specialty and rubber business in the second half of 2016, we are tightening our 2016 adjusted EBITDA guidance towards the higher end of our previous range and are now guiding to between EUR215 million and EUR225 million from the prior range of EUR205 million to EUR225 million.

This is based on the assumptions that volume growth will be in line with current GDP expectations and that oil prices and exchange rates will be at the level seen during the second quarter of 2016 with negative feedstock impacts not worsening from levels seen in the second quarter of 2016.

For capital expenditures our guidance remains at about EUR60 million, for depreciation EUR60 million as well, and for amortization EUR20 million. Our tax rate expectation on pretax income remains at 35%.

I will now turn the call back to Jack, who will provide a few comments on our operational priorities and wrap things up before we head to Q&A.

Thank you Charles. I previously discussed with you the 2016 operational priorities we've listed on slide 11, so I'm not going to review them individually. It is, however, important to say that these remain our priorities and are being vigorously pursued.

Let me give you a few examples of what we're doing. As I previously mentioned, our China facility continues to execute extremely well as we expand our specialty and technical grade mix there. In fact, our counties team increased its second quarter volume by about 20% versus the preceding first quarter and was up over 5% against the prior year's second quarter.

In our Cologne, Germany plant, we have worked through the commissioning of the post-treatment facility we recently installed and are now filling the unit with new sales of premium grades targeted at the high-end coating and printing market.

In a similar manner, we are reviewing capacity increases for post-treatment facilities in Korea, which will soon be add capacity based on our outlook for sales in the region. We have expanded our flexibility to receive feedstock from multiple sources in certain of our plants, and our variable cost-savings initiatives continues to run even in this low oil price environment with the installation of high-efficiency reactors and improved heat recovery equipment.

As a result of these initiatives and those we have yet to accomplish, we remain upbeat of potential of both our segments, indeed about Orion as a whole. We have the right teams and strategies in place to continue growing profits in both of our business by upgrading our mix and the capacity to support advanced grades by providing unparalleled technical and application support on a global basis, by optimizing our production footprint to increase asset efficiency, and by continually improving feedstock conversion cost.

As always we wish to thank our investors for their confidence in Orion and all of our employees for their hard work thus far this year.

With that, Operator, please open the line for questions.

Thank you. At this time we'll be conducting a question-and-answer session. (Operator Instructions) John Roberts, UBS.

This is [Josh Spector] on for John. Just had a question on the feedstock differential in terms of re-linking with index pricing. Is there something that you guys can see that will need to happen to help that out? And is that something like higher oil, lower volatility or just time? What are your thoughts around that?

It's a little bit of all of those, Josh. These things became decoupled when the price fell pretty dramatically. We think if -- as spot prices back up, it tends to adjust itself. In the meantime, we think even in the absence of that type of rise, there's going to certain arbitrage opportunities and certain movements in the oil market that will bring some level of stability back to it, but it's not happening quite yet.

And we've really dealt with this for both the quarters of this year and continue to deal with it so far to some extent this year. In the meantime, what we've done is we've addressed it short term, particularly in the area where it hurts us the most in Europe with the application of these surcharges, which have been very well implemented in that region.

So I mean, as a short-term fix, that's one thing. The other factor is we will continue to look for ways of adjusting the formula to better mimic actually the indices that we have out there in the market, which is an ongoing work in our organization right now, targeting towards the 2017 negotiations.

Okay, that's helpful. And just in terms of the feedstock supply range that you guys highlighted in the release, does that represent a total supply or is that a certain percent and just are you able to give some type of feel on like an all-else-equal basis how things might go directionally for you guys?

Actually, it's one deal in one region.

Okay.

And that's as far as I would be willing to say about it right now.

Okay. Just one last one on specialty side of it, so your gross margin on a dollar per ton basis, I have it up about 6% in the first half over 2015. Is that something you guys think is sustainable, or as oil prices eventually rise at some point, is that something that would have to be given back or is there something that's been changed fundamentally that helps you guys retain a higher margin level there?

Well, I mean we've appreciated a lot just from the fact of leverage as we've grown that business. So we've seen an expansion of the gross profit per ton just simply from the volume expansion, but we've also had a very nice increase in our product mix. This product mix will go a long way towards making these margins sustainable as we go forward.

Clearly we benefited from a fall in the feedstock price. When the feedstock price rises we'll have some pressure, some competitive pressure and customer pressure, nothing else, to see those margins compress a bit, but we've got activities in place right now to see price increases. In fact I believe there's a initiative from many people in the industry to increase these prices to deal with this sort of thing.

So hopefully we will be able to maintain that. We've certainly been able to do so in this most recent rise in price with price of oil moving up some $10 a barrel or so over the last 30 days to 45 days. And we've been able to maintain it during that period.

Okay, thanks.

Ivan Marcuse, KeyBanc Capital Markets.

Nice quarter. And the specialty business which is doing -- which is obviously having a very good year-to-date, is there any sort of seasonal -- as we go from first half into the second half, is there any sort of seasonal impact or mix to think about in terms of volume or should sort of these volumes sort of stay at this level in the mix or stay here, so all is equal margins are -- should at least on the gross margin part stay stable or is it a seasonal issue?

I think typically -- you typically see a bit of a slow-down in August. European business tends to slow down in August and we see that and then the -- in the past at least we've seen a slow-down at December although I have to say the full quarter of last year was exceedingly strong. So if we continue to repeat what we saw last year in the fourth quarter, we'll see a bit of a slow-down in August, but to some extent I don't think it's going to be that material second half versus first half.

Okay. And then in terms of the feedstock, I understand that they remain a headwind. I -- should they be -- should that I guess I don't know how to say it, but the impact on a year-over-year basis or an impact should be anymore in the second half versus the first half or will the headwind be roughly the same?

Well, I mean -- hi Ivan, it's Charles. The guidance we've given for the remainder of this year, for this year as a whole is predicated on the fact that those differentials stay around -- roughly around the level we've seen in Q2. That's what we think. So that's our assumption at the moment.

Okay. Then moving to -- looking at your guidance, if you -- based on what you did in the first half and your midpoint of you guidance looking for EBITDA sort of to stay I guess flat plus or minus a couple of million dollars second half versus first half --

Sorry, what's your --

Up significantly versus last year.

Right, but your pricing, pricing should get a little bit better. Your specialty is going to remain fairly stable plus or minus a little bit in volumes, I think you said you are getting a little bit better on the rubber side and I imagine there's a little -- some cost efficiencies. So why wouldn't the second half be better than the first half which is -- what is going against you I guess?

Nothing is going against particularly. As Jack commented when we were just talking a few minutes ago about specialty August can be -- historically is a little bit quiet. December vacation period as we've seen every year and that applies essentially to rubber as well, but those are the factors.

Okay, great. And then I'll jump back in the queue. Thanks.

Kevin Hocevar, Northcoast Research.

Congrats on a nice quarter. Wondering if -- maybe we could talk about specialty real quick. Obviously the volumes are doing phenomenal here, growing 16% volumes year-to-date. I was curious how much do you think the market is growing, how much do you think is share gains, and obviously these share gains are taken from somebody else. Do you have any concerns that people will try and counter this and take some of the share back? Later do you think that you can kind of sustain these types of volumes and keep growing well above the market?

We had this exact question at the first quarter earnings call about the ability to continue to grow with this rate. We question ourselves whether we'd be -- whether we would see these kind of double-digit growth rates in the second quarter. In fact we did see them and we're on the track I think probably for the year to have very good growth. I'm also sure that it will be sustained for all four quarters of this year, be great if it would be.

But that having been said, it makes us assess really the fundamental growth rate of the specialty market as to whether they not be growing actually during this year at a greater rate than what we'd said in the past because what we've said in the past is that we thought these specialty markets typically grew at GDP-plus, so a couple of thoughts; there may be some dynamics in the world right now that are pushing that to greater rates, some changeovers, some extensions of this particular material, and some polymer applications and things like that.

So there may be two things going on here. One is a fundamental increase in the growth rate of this -- of the specialties market which would be exceedingly good news for this particular segment, and the second is that I think we probably are growing at a greater rate even than that. I don't think the market is growing at 15% per year, be nice if it was, but let's assume that it's higher than what we said and the remaining increment is actually a growth rate of ours greater than the market.

Still that's understandable because as you know we invested heavily in a lot of technical and salespeople around the world in these underrepresented regions, and I think that's beginning to pay off handsomely for us with extensions and just simply a greater deal of technical attention to our customer base. So I'm pleased with that.

We would exact the competitive response, I mean, if -- we've got good competitors out there, certainly they've seen what we've done. I think to the extent we can see those growth rate or estimated growth rate, we don't think it's at our level, we feel the pressure out there, but we do what we need to do, we work with our customers so we come up with the type of solutions and pricing and service that we feel is appropriate and we'll let the competitive battles go.

Okay, great. And then kind of back to Ivan's question real quick on differentials, I think there was a EUR2.2 million-EUR2.4 million headwind this quarter and I thought that third quarter of 2015 was really the low point for that, so the -- and I think fourth quarter was better than that by a lot. So it seems like the comps is getting easier, so when you say that you expect differentials to kind of stay where they're at, does that mean that the year-over-year headwind would lessen from that EUR2.2 million-EUR2.4 million or would -- are you saying you expected that to remain at that EUR2.4 million-ish headwind per quarter the balance of the year?

I mean the per quarter comparisons is a bit complicated because you've got two moving pieces. My comment was about the absolute level of differentials we're experiencing, or experienced in Q2, and what we expect for the rest of the year. So it's the absolute level of differential we're having to pay or had to pay in Q2, and we assume that that's going to stay about at the Q2 level for the rest of this year.

To your comment it does, when you compare it to prior quarters because of what the prior quarter had done, it fluctuates around, but it's -- happy to go through it, there's probably a bit too many moving parts for a call like this.

Sometimes it's difficult to talk about the differentials without talking about the counter-measures, the significant counter-measure and surcharge that we put in place, and we've gone a long way towards dealing with that EUR2.2 million headwind in this particular quarter with full effect that we'll see in the second half from these surcharges.

Okay. And to that point, EBITDA in Rubber Black has been about EUR19 million a quarter here in the first half for the year, so do you expect with the surcharges in place for that improve in the back half and can you give some type of expectations into how much you'd expect that to improve?

We do because obviously the surcharges are going in place. They started to go in place in second quarter, but will come fully online as it were in Q3 and then Q4. So we do expect, everything else being equal, a pick-up in rubber, but like any business, a lot of moving parts, but that was one of the reasons why we look with confidence into the remainder of the this year and the tightening of our guidance.

Okay, great. Thank you very much.

(Operator Instructions) Charlie Webb, Morgan Stanley.

Well done again on the results, Q2 results. Circling back to Specialty Carbon Black, I was just wondering if you could give us a bit more color on the end market that have been driving this very good growth now for two quarters, first question.

And second question, what was the impact from the Rubber Carbon Black (inaudible) turnaround in Q2, if you could quantify that, that'd be great.

Yes. When you -- the second part of your question dealing with the rubber turnaround, are you talking about the maintenance turnaround there, is that what your question is?

Yes, you mentioned maintenance turnaround is having an impact on non-margin as one of the contributing factors.

Yes, let me address the first one, Charles can take the second one. When you look at the specialty business, as we said in our commentary, we see growth in all regions and practically all sub-segments. What does that mean? It means that when we see -- when we look at our business, we think about the split between polymers for instance, coating that eases printing ink in special applications, even down to batteries, and admittedly the fact is when we look at the detail of the growth in this particular quarter, in fact in the first quarter we see that through out, I think diving just a little bit deeper into that, so what would be driving that, with auto demand in the United -- well, around the world in fact, but the auto demand particularly in Europe is very robust.

So we've seen a very nice pick-up in the first half in the automotive demand for coatings and that's also our market priorities in sealants, materials that go into windshield sealants and things such as that. The (inaudible) market in Europe has been exceedingly strong interestingly enough.

There is a dynamic going on there which we had not seen in the past, but we're seeing a significant growth in polymer pipe market, as well as the line and cable market shifting over to the US. The pipe market there had been fairly depressed through 2015 because it was driven a lot by the oil and gas industry which -- that story is well-known.

But in the second quarter this year actually begin to see that pick-up somewhat, so you've got the polymer pipe business pick-up there as well. And our Asia-Pacific business, again, across the Board, strong sales in coatings, strong sales in adhesives and sealants and a very good market in what we call our fiber applications which typically go into apparel which has been -- continues to be quite strong.

Charlie you had a question about the impact from the heavy turnaround schedule. Low single-digit in this quarter we've seen.

Okay. Thank you very much guys.

Jeff Zekauskas, JPMorgan.

This is [Yoyo Young] for Jeff. You reached your guidance for the EBITDA for the year. How much of that is due to stronger than expected volumes and how much is because of the weaker euro benefit?

Let me pick up the weaker euro benefit as it were. I mean, to be -- we've -- the FX impact we've seen this year has been relatively small. We've talked previously about -- some about the impact of currency on our business. So the FX movements have not played a significant role in the favorable reassessment of our guidance for the year.

Jack will give you some feel for the volumes, to your second -- the second part of your question. But this rating -- re-rating of the guidance, Yoyo, is really a function of two things fundamentally; one is the fact we've got a good -- very good first half under our belt, so we've got better line of sight for the year as a whole obviously.

And secondly, we've touched on this earlier, we like obviously the dynamics in the specialty business which we've talked about today, and also we look with some measured confidence in the second half regarding rubber, although we are obviously managing a number of factors that we've talked about today.

Regarding volumes, we -- as I said it in the commentary, we think the volumes will remain reasonably stable as we go into the second half and what does that really mean? It means that the first half was surprisingly strong in the specialty area and we continue to believe that we'll continue at a stronger pace than the market, maybe not at a double-digit growth rate as we've seen in the past, but at any rate I don't see any reason to say anything other than the second half is going to be comparable as the first half at our view for volumes with very strong build-up of the specialty area.

The fact is a lot of what we've done with our guidance is say we've got two quarters or full half-year under our belt at this point, so it gives us confidence to raise that based on an expectation on the second half, built on a stronger foundation than the first half than what we had anticipated when we first had our guidance.

Understand. So can you talk a little bit about what's your utilization rate in the rubber business and in the specialty business?

Specialty business is running in the high 80s. We -- that's a bit of a tricky number, okay, because there are -- we can't really think about that business quite like you can about the rubber business which I'll speak to in just a moment because we have the ability to switch capacities back and forth depending on what particular products and what we wish to sell to maximize margin.

But I'd say largely speaking we are tight, but I would say comfortably tight at this point. The ability to meet shipments is always our issue in specialties and we continue to look at -- as we've said in our earnings release and other places, we continue to look at the areas where have some bottlenecks, but just some of our post-treating facilities to make sure that we stay head of the curve, making sure that supply always stays ahead of the demand in this market.

So having said that, that's kind of the specialty story. The rubber story, we're running globally right now in the mid 80 and it's a bit of mixture between some of the businesses that are running higher than that, and some below. I'd say, generally speaking, the European business right now is the tightest. It's running in the low 90s, it seems to be extremely tight right now throughout Europe, both in the tread grade and in the carcass grade materials that we sell.

Korea, US, roughly in the middle 80s, kind of average operating rates in regard for the rest of the facilities. Our Brazilian facility, as we've said in the past, is actually running a little bit stronger than what we would expect out of Brazil. There's a couple of things happening down there.

First of all, you have to recall that our Brazilian facility is reasonably small, so small moves down there enable us to move capacity utilization in that facility fairly quickly, but it does appear that several of the tire manufacturers in Brazil are actually using that as an export platform right now because the costs seem to work to their advantage and we've seen a net difference in trade balance in Brazil. So our business down there is actually a bit stronger than what the headlines of Brazilian economy might reveal. And I'd say the rest of the regions that I perhaps hadn't mentioned are operating roughly at that at mid-point.

Okay. Thank you so much.

(Operator Instructions) I'm showing that there are no further questions at this time. I would like to turn the call back over to Mr. Jack Clem for any closing comments.

Well, thank you everybody for joining our conference this morning. I think it should be clear that we're very confident about this business. As I said earlier, this has been a spectacular first half for our specialty segment and that's a performance that we have every reason to believe it's going to continue and even improve as we go forward.

There is a lot of good activities out there, new product development, product extensions, people on the ground, and just a very ambitious and healthy team running that organization right now. We're very pleased with the performance there and we hope it's reflected in your view of the quality of this Company and what it's doing to our overall business.

The rubber business as mentioned, a bit of a tough first half, but we've got a lot of good initiatives in place right now to deal with that with our surcharge, anticipation of price movements going into -- or towards the 2017 negotiations. With our operating rates where they are right now, we think that that's certainly plausible and the indications are that there are price initiatives going on currently in most of our markets right now for rubber to recover some of this differential issue which is an industry-wide impact.

So we're hopeful to see that improve as we go into 2017, but having said that, again thank you for your attention. We appreciate it and look forward to speaking to you at our next conference call. Thank you.

Thank you.

This concludes today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.