Orion SA (OEC) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Orion Engineered Carbons Fourth Quarter 2017 Earnings Call. (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 of Investor Relations for Orion Engineered Carbons. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons conference call to discuss fourth quarter and full year 2017 financial results. I'm Diana Downey, Vice President of Investor Relations. With us 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 the slide presentation to the Investor Relations portion of our website. We will be referencing this presentation during the call.

Before we begin, I'll 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, February 23, 2018, 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.

Thank you, Diana. Good morning, and thank you for joining us for our fourth quarter and full year 2017 earnings conference call.

Our agenda, shown on Slide 3, addresses the key metrics of our fourth quarter. Some of them are our noteworthy accomplishments of 2017, comments from the fourth quarter performance of our 2 Carbon Black business segments and the business as a whole.

We will also offer our view of the current and anticipated state of our markets and our actions to capitalize on these improving markets. Charles Herlinger will provide detail on our financial results and discuss guidance for the full year 2018.

We will then open the lines to take your questions.

Before we discuss the details of the final quarter of 2017, I would like to comment on some of our key accomplishments of the past year. Slide 4 lists some of the highlights, which point to the strength of Orion's business model, our strategy and the capable execution of our team. It was a year with challenges, as usual. But yet we have positioned the company to take advantage of an improving economy by continuing to make major changes in our production network that align with our strategy of moving our capacity to higher value products.

We strengthened our balance sheet again with improved long-term debt financing, committed to a simplified reporting and listing structure by moving, for example, to dollar reporting in response to input we have received from our investing community.

And as of December last year, flow to the remainder of our stock to the public market with the exit of our private equity owners.

It was another year of successive EBITDA growth and strong cash conversion for Orion.

Now moving on to our fourth quarter highlights on Slide 5. Our 2 Carbon Black businesses executed well this quarter with results in both Specialty and Rubber largely in line with our expectations.

Our overall volume declined 2.8%, with Specialty increasing 5.1%. Again, above market rate while Rubber volume fell just under 5%, as expected, due to our move to close unprofitable capacity in France at year-end 2016 and in Texas during the fourth quarter of 2017.

In addition, we have taken substantial Rubber Black capacity out of the system by converting Korean capacity to higher-margin Specialty Black production. This conversion will be completed in the second quarter of 2018.

Although our total volume was down, improved efficiencies and higher energy prices for the revenue derived from co-generation had an overall positive impact on our numbers as we posted a solid adjusted EBITDA of EUR 56 million. Net income in the fourth quarter improved to EUR 21.1 million and earnings per share to EUR 0.36, representing double-digit gains in both as a result of the positive impact changes in the U.S. tax code.

Adjusted earnings per share fell slightly by EUR 0.01 to EUR 0.38, reflecting primarily an increase in recurring depreciation.

Cash generation remains strong with EUR 54.8 million from operations that more than covered our CapEx, dividend and interest needs in the quarter. We also continue to reduce our leverage in the quarter, bringing it down to a record low of 2.29x as of year-end.

Slide 6 provides further details on the 2 business segments, with updated views of our regional production coverage and key profitability trend lines. Specialty Black continue to grow as a percentage of our volumes rising to just under 23% of the total. Higher feedstock costs, especially the quick rise we saw at the end of the year, pressured the margins in the segment. Offsetting this margin pressure, higher energy costs benefited the Rubber segment and in spite of 5% lower volumes, adjusted EBITDA rose 12%.

The 2 businesses had distinctly different pricing and variable cost structures but worked as a natural hedge during this quarter and for the majority of 2017. In addition to growing specialties, we grew technical rubber grade volumes again this past quarter to 36.5% of Rubber volume.

Total volumes of higher value-added Carbon Black products now account for 51% of our total volume, in line with our long-term strategy to improve our overall capacity and sales mix.

As of outside of the slide illustrates volume in China continues to move up as we've worked to improve the positioning and execution in this region, especially with our facility in Qingdao.

Turning to Slide 7. We grow our Specialty volume by 5.1% in the quarter, with the growth evenly distributed around the world. We are seeing solid demand in all of our major end markets for coatings, inks, polymers and special applications. Demand remains especially strong in the (inaudible) market for both automotive and architectural applications and in polymers for piping and synthetic fibers.

We have maintained capacity ahead of demand with the bottlenecks and the major conversion of capacity in Korea, which included a new Specialty production line that was commissioned in late 2017, and already qualified on many products for sale, primarily in Korea.

Specialty revenue increased to EUR 98 million versus EUR 96.1 million in the prior year's quarter due to volume gains and price increases, offset by regional mix and foreign exchange translation impacts. Adjusted EBITDA was pressured by higher feedstock costs, which we were not able to overcome with our pricing initiative that have begun midyear 2017.

These initiatives were closing the gap until we saw another rise in the cost in the fourth quarter, which we are now working to counter. Significant progress has been made, and with the recent leveling off of feedstocks, we expect to recover a substantial amount of the ground lost this past year.

As mentioned in our earnings release, we reached an agreement to sell the land occupied by our smaller plant in Korea on terms and conditions that are in line with our expectations, including a closing of the transaction at midyear this year. The funds received are expected to more than offset the cash requirements associated with this major consolidation project.

This facility was in the stage production at that time. Although the volume shown on Slide 8 came in largely as expected, dropping 4.9% to 210,300 tons largely due to the closure of capacity in France and in the U.S., and reallocated capacity in Korea. Revenues gained 5.7% to EUR 190.5 million due to the pass-through of higher feedstock costs and stronger co-generation contribution.

We completed a major co-generation upgrade in our plant in Cologne during the quarter. Substantially increasing energy sales to a suburb of Cologne, reducing their dependence on coal-fired energy, and at the same time, significantly modernizing our plant's energy production facilities.

Rubber Black demand strengthened as we approach the end of the year, supporting negotiations for major agreements for 2018. We were pleased to see real pricing improvements in all of the regions of the world as industry dynamics are clearly moving in a positive direction. Demand continues to increase from the backs of the improving economies and supply has not kept pace.

We see utilization rates running in the 90% range in Europe, the mid- to high 80% range in the U.S. and even higher in certain grades in the U.S. And we're at full capacity in Korea. In China, the government imposed production curtailments in some regions and sharply higher feedstock costs impacted the competitiveness of weaker firms in the region. This created favorable conditions which allowed us to increase price to keep pace with significant increases in coal-fired-related feedstocks and even improved margins as utilizations tightened.

Gross profit in the fourth quarter decreased EUR 2.4 million to EUR 44.7 million and gross profit per ton was stable at EUR 213 despite onetime charges associated with hurricane Harvey and the restructuring in Korea.

Adjusted EBITDA increased 12% to EUR 28.4 million as a result of stable gross profit development and the exclusion of these onetime charges. Rubbers' adjusted EBITDA margin of 49% represented an all-time high for Orion as a public company but remains an opportunity for further improvement.

I will now turn the call over to Charles for more detail on our performance.

Thanks, Jack. Good morning, everyone. Turning to Slide 9, in our consolidated fourth quarter results. Our overall volumes decreased by 2.8% or 7,700 metric tons from the prior year's quarter to 272,900 tons with the major components of this decline attributable as they have been throughout much of the year to the closure of our Ambès, France rubber facility, capacity reduction in the U.S. and the ongoing conversion of capacity in South Korea.

Revenues, nonetheless, increased by 4.4% to EUR 288.5 million in the quarter compared to EUR 276.3 million last year, largely due to the pass-through of higher feedstock costs. Our overall contribution margin declined in the fourth quarter following 4.1% to EUR 112.9 million versus EUR 117.7 million in the prior year's period.

As the top waterfall chart on the right-hand side of this slide shows, this drop in contribution margin was driven by the change in volume as well as the impact from sales mix, foreign exchange effects and feedstock mix. Efficiency gains, base price and other items provided a partial offset.

Referring to the second waterfall chart on the right-hand side, the contribution margin decline in the quarter was more than offset by a positive foreign exchange impact on our fixed costs and by SG&A cost savings. As a result, adjusted EBITDA increased by 0.7% to EUR 56 million. Our adjusted EBITDA margin of 19.4%, declined by 70 basis points versus last year's fourth quarter, in large part due to the higher revenue base.

The waterfall chart on the bottom right-hand side of this slide analyzes the change in our operating results or EBIT, which decreased from EUR 36.7 million to EUR 26 million in the fourth quarter of 2017 compared to the fourth quarter of 2016, as a result of the decline in the contribution margin. An increase in depreciation associated with the Rubber footprint restructuring in Korea and the impact of hurricane Harvey as well as Rubber footprint restructuring expenditures and other onetime items, offset by fixed cost reductions and favorable foreign exchange effects associated with our fixed cost base.

The waterfall charts on the bottom left-hand side of this slide, analyzes net income development, which showed a double-digit gain to EUR 21.1 million versus EUR 18.6 million in the prior year's quarter. The biggest swing factors here being a onetime income tax benefit as a result of the U.S. tax reform, offset by the increase in depreciation to which I just referred.

Now turning to Slide 10, which shows our full year cash flow dynamics and our key balance sheet metrics as of December 31, 2017. For all of 2017, we generated EUR 151.8 million in cash from operations. A figure with which we are satisfied, especially considering the upward movement in oil prices, mainly during the second half of the year, which impact the carrying value of our working capital. Our uses of cash over the same period, which include capital expenditures, interest payments, required debt repayments and dividends totaled EUR 145.9 million. As a result, our cash position prior to voluntary debt repayments increased by EUR 5.9 million in 2017.

Looking at our balance sheet as of December 31, 2017. The company had cash and cash equivalents of EUR 60.3 million compared to EUR 73.9 million on December 31, 2016. The company's noncurrent indebtedness as of the fourth quarter end was EUR 567.6 million with net debt of EUR 520.7 million. Taking current term loan B and local debt into account, which represents a leverage ratio of 2.29x LTM-adjusted EBITDA down from 2.5x versus the prior year's level and a new low for Orion as a public company.

Slide 11 presents our initial 2018 guidance and further cash flow detail regarding base business requirements and capital allocation. We currently expect adjusted EBITDA for 2018, to be in the range of EUR 230 million and EUR 250 million. Based on the assumptions that volume growth will be in line with current GDP expectations and that oil prices, exchange rates and feedstock impacts will be at levels experienced late during the fourth quarter of 2017. Since we expect to begin reporting our results in U.S. dollars rather than euros with the first quarter 2018 results, and based on the same set of assumptions, we are guiding to full year adjusted EBITDA between $270 million and $300 million. With the performance in 2017 as a backdrop and with the positive expectations we have for the future development of the business, it is appropriate to address the company's thoughts on capital allocation, namely we expect our dividend levels to be oriented towards increases in net income while we confirm our intention to remain in net debt to adjusted EBITDA leverage ratio in the range of 2.0x to 2.5x, based on the current pipeline of investment opportunities.

Furthermore, it is intended to implement a program to buy back up to $20 million of Orion shares over the coming year as opportunities arise to do so. We expect base capital expenditures to be approximately EUR 80 million, including completion of the Korean capacity transfer but before EPA-related CapEx.

We expected that the cash proceeds derived from the sale of our plant site in Seoul, Korea will more than offset all the capital expenditures and other costs associated with this consolidation project. As for the remainder of our guidance metrics, we expect depreciation and amortization to be approximately EUR 80 million. Our tax rate expectation for 2018 and pretax income is at a rate of 32% to 33%.

As for our stated intent to convert our financial statements from IFRS to U.S. GAAP, we expect, currently, these to take place during the second half of 2018. But the switch to U.S. dollar reporting and to U.S. GAAP accounting are important milestones for us to be eligible for inclusion in the relevant U.S. equity indices and thus open ownership of our own stock to the increasingly significant demand from index-driven investors.

I will now turn the call back to Jack, who will wrap up our prepared remarks before we head to Q&A.

Thank you, Charles. Slide 12 summarizes the favorable development that are driving the creation of value for Orion in these markets. This slide also speaks to major initiatives we have underway to address these developments. These have been, and remain, the focus of our business.

We have referred to the tightening Carbon Black markets but believe it might be helpful to look at these on the region-by-region basis. Slide 13 shows that in most regions of the world and in fact, taken as a whole, the Carbon Black production industrial network has not kept pace with demand growth. Well before this demand was fed by an ever-increasing supply of capacity from China, in fact an oversupply, that process came to a halt a couple of years ago when the domestic players began to lose competitiveness due to major swings in the cost of their feedstocks.

Furthermore, environmental regulations are being strengthened and even more importantly, enforced, resulting in the curtailment and closure of capacity. Chinese Carbon Black demand will certainly continue to grow and Carbon Black capacity will also grow, but not at the disruptive rate seen in the past. The stronger producers, those with the resources and technology to deal with regulatory and market requirements, will continue to grow with this market. The situation for the weaker players that have reduced or been forced to reduce supply will continue to be increasingly challenging.

In the U.S. and in Europe, margins have not favored capacity increases and, in fact, have resulted in either stagnant or reduced capacities. And yet, demand will continue to move up in these economies and have taken a favorable turn lately with the construction of new greenfield power plants in both regions, some aimed at regional demand growth, some for on-shore production previously produced in Asia.

As we begin 2018, we're encouraged by these market dynamics and have seen improved pricing demonstrate that our optimism is not unfounded.

But we will not simply wait for pricing alone to improve this business. We will continue to work on improving our mix with premium Specialty grades and the systematic move of Rubber capacity to technical rubber grades, where our goal is to have this subsegment provide the line share of profit for the Rubber segment. We intend to outgrow the market in Specialties but will take the opportunity in 2018 to temper this growth and focus on recapturing the margin lost to rising feedstocks.

As you know, we reached an agreement with the EPA involving the addition of pollution-control equipment among other requirements. The agreement is in line with the guidance given regarding capital expenditures needed to comply with this settlement. With all 5 U.S. Carbon Black suppliers having settled, we would expect these costs to become part of the uniform cost of business and be passed along to our customer base in due course.

Looking back at 2017, it was a transition year for Orion as our 2 major private equity investors exited the stock. Management purchased an additional stake in the company, and we begin converting our financial results to U.S. dollars and U.S. GAAP accounting. Our float now approaches our total share count. Our daily trading volume has gone up by a factor of 5 in the past year and our share price has responded. We believe, however, that it remains below industry average valuations, and we are committed to take the steps needed to close this value gap.

Nevertheless, we will remain focused on our long list of organic growth projects, which can be funded by our ongoing cash generation directed at maintaining our leading position at specialties, moving our mix of Rubber towards higher value technical grades and improving our efficiencies to remove any competitive disadvantage in our operations.

We have the staff, the cash and the support of our board. Not only for these initiatives but also for those that could result in step changes and growth such as true synergistic acquisitions. I believe 2018 will be an exciting year for Orion, for both our employees and our shareholders, and we look forward to updating you on our execution and performance as the year progresses.

As always, I would like to end our prepared remarks by thanking our investors for their support, our customers for their business and our employees for their effort. Operator, please open the lines up for questions.

(Operator Instructions) Our first question comes from the line of Laurence Alexander with Jefferies.

Could you just go over again, I'm sorry, what you're doing with conversions from Rubber to Specialty or curtailments over in 2018, 2019, what your plans are?

I mean, the major conversion going on right now is the conversion in Korea. That's a significant one that started last year and is essentially a conversion of one of the largest plants we have in the system. It's in conjunction with the closure of the smaller plant that we have in Korea, where some of these products were made. So by closing that plant, which is roughly 40,000 tons or so, we're converting the capacity in that facility in Korea to accept all of that business and walking away from some of the lower margin business in that area. And that's a conversion which involves several units. We haven't disclosed how many units, but it's quite a few units. And that's the major conversion that's going on right now. We, of course, have on the board, additional conversion opportunities that we're looking at, currently. And will have to make a call at some point in time, what conversion needs to happen or if it's a new unit. And we'll make -- we've added a new unit as we disclosed earlier in Korea, simply because the demand for certain types of products require a new unit rather than just a particular conversion, and pressuring that a little bit, just so you can understand how we think a bit more, is as we're seeing some of the margins rise in Rubber Blacks, particularly in certain regions, the incentive to actually do a conversion lessens a little bit. So we will make a decision based on the margins that we have in Rubber as (inaudible) units are largely running full right now around the world, which is just a few exceptions. We'll make a conversion there or add a unit to the system.

(Operator Instructions) Our next question comes from the line of Kevin Hocevar with Northcoast Research.

I wonder if you could give a little more color on your volume expectations by the segments? Because I think you mentioned kind of expectations for volume growth that follows, I figured, what you said, GDP or what have you. But Specialty is even growing, kind of a mid- to high single-digit range, but you also mentioned that you might not outperform the market by as much as yours. You're really focused on getting pricing and then on Rubber, you closed the line in Texas. You have consolidated from Korea. So I'm just wondering if there's still some headwinds there. So I was just kind of wondering if you can help us kind of frame it up, how to think of volumes after factoring all of that stuff in according to the segments in 2018?

Yes, the Specialty segment, I think we've talked about it in the last quarter, in the call after going several quarters, a couple of years, in fact, it is really high single digits or even low double-digit rates. We feel like what we need to do now is consolidate around the business that we've got and gain back the margin that is lost by this pressure on the feedstock. So while we still intend to outgrow the market, and I think what I've said last quarter call still holds, this is going to be somewhere in the middle-single-digit rate, we believe, okay? We probably could push them out a bit, but we think more importantly right now is, given the pressure that we're seeing from feedstock in the third, fourth quarter this year, which continues -- at least it's leveled off in the first quarter of this year, we think it's important to really temper that growth and consolidate the pricing around the margins that we think this business actually deserves. From -- does that answer your question there, Kevin?

Yes, that's helpful. And then on the Rubber side, what about there? Is there still going to be impacts from still anniversary-ing the closure of the Korea consolidation and also the line closure in taxes? Are those going to be headwinds on volumes still in 2018? Or should we essentially just expect more of a market-type growth rate in '18?

I think a market-type growth rate is probably fair. While a lot of our systems are running right now, there are some capacity gaps here and there. I mean, largely speaking, the whole network for our Rubber system right now is running roughly 90% or so. That's very, very heavy in Europe. Our capability for expansion there is, some sort of expansion of sales is limited. But there's still some headroom in the other places in the system right now. And I think given that, and given our capabilities, I think we should be able to grow, I guess, take what you consider the original growth rates, and we should be able to do that. I mean, while we would say that we're taking part of the system out in U.S. with the capacity that we've closed, we know that part of the 2017, our Chinese facility wasn't completely full either. It filled up as we have moved through the end of the year with that pressure that came in the Chinese market with the environmental curtailments and so forth. So there's a bit of an offset there. And there's a few other puts and takes like that. A long answer, Kevin, but for the most part, I think you could probably model along the regional growth.

Got you. Okay. And then when I look at the guidance, you talked about EBITDA of EUR 230 million to EUR 250 million in 2018, which implies -- what was it EUR 228 million in 2017. Still the midpoint implies about EUR 12 million EBITDA improvement in euros. But given the level of pricing, it sounds like it's being achieved across the industry in Rubber Carbon Black and it sounds like Specialty should probably grow volumes and I would imagine there'd be some EBITDA growth there as well as you recover some of the price drop. It's not like pricing actually you're taking are gaining some traction. And so I'm just trying to think of, are there any -- it seems like that could be a little conservative. So I'm trying to understand if there's some -- I think the FX will probably a little bit of a headwind. But is there anything I'm missing in that bridge that might be -- act as offsets? Or what would it take, I guess, to get to the high end versus the low end of the guidance range in 2018?

Yes. Kevin, it's Charles. Let me just start with the part of your question and I'll get on to the rest of it. Just on the guidance you are referring to is euro-based, obviously, when we convert our financial statements to U.S. dollars, which will be effective, we expect it to be effective with the first quarter of 2018. The FX effects you referred to, assuming the euro strengthens a bit of space where it is versus last year, will actually happen to move in our favor. So just wanted to get that point out there, which sort of underlines, in a sense, the point that you are trying to make, which is that we're starting with a pretty broad guidance range that will narrow as the year unfolds. And finally, as we've said before on the call, we've learned over the years that you start broaden, you narrow it as the year happen -- runs through, and hopefully, you narrow it with a slant towards the higher end. And that's the factors that we are seeing now looking into the rest of 2018 as you summarized, look pretty good. And so there's nothing specific that we would say against and the comments you have made, other than the fact with the beginning of the year, and we've learned to have the years to do as I just said.

Okay, perfect. And then maybe a last one for me. How are the pricing actions going in Specialty? It didn't sound -- if I look at the EBITDA per ton, it got down to about EUR 441 in the December quarter, which if I look back in history, that's pretty low and it tends to bounce back and it gets to that type of levels. Could you give us some type of commentary on what you're seeing, how those pricing actions are going and kind of when you would expect to recoup those -- the inflation that you've seen?

We've made pretty good progress on that, Kevin, going into the fourth quarter of the year, and then we had that spike in the oil, which sort of set us back a little bit. I mean, quite frankly, it has been a headwind for us and it's something that we began fighting in the middle of the year. One of the reasons, also, that we think we need to focus on price rather than gaining the market share that we've gained in the past. So we have -- we're focused on that as I said earlier, but I guess more to your point, we made some good progress going into the fourth quarter. I'm glad we did what we did, otherwise these fourth quarter numbers and margin for Specialties would look a little less attractive than they do right now. Before the end of the first quarter, we've had some success, actually, and I think we'll probably be able to give you more color on that for our earnings call for the first quarter of 2018. But for the time being, I'm feeling pretty good. I mean, given the tightness in the industry right now, and the fact that we see a lot of demand for our products. In fact, some demand that we just simply can't satisfy some corners of the world because of limitations here and there, we are beginning some decent moves on price. So probably more color on that is appropriate for the first quarter call. But right now, I'm feeling fairly optimistic about our ability to push back and get some of the margins back in Specialty that we had in those prior quarters.

(Operator Instructions) Our next question comes from the line of Duffy Fischer with Barclays.

It's Michael Leithead on for Duffy Fischer this morning. I guess, first, you mentioned in your release your intention to grow your dividend as your net income continues to grow. Now, obviously, I don't want to front run any conversation, obviously, you have with your board, but is there any broad target you're aiming for in terms of payout ratio or some other metric we can work off of to think about kind of how we should expect that to grow?

No, I mean, we're not in a position to start pegging our dividend to a particular payout ratio. But I would take this as a general guidance, the levels of payout ratio you tend to see in the chemical industry. We've had historically, a rather high payout ratio. It's now normalizing quickly. And we wanted to signal that, that process continues. We're mindful. It's not the only thing we're looking at to enhance shareholder value, but we're mindful that's an important lever to adjust as well and it's part of our capital allocation policy.

Got it. Okay. And then you called out a co-generation benefit, I believe, in this quarter in the Rubber business because of higher energy prices. I was hoping you could talk about maybe the rough magnitude of the gain this quarter or just any way you can help size the co-gen earnings relative to the base business this quarter?

Yes, we haven't given a rule of thumb with respect to that. Just probably, I think we probably could do that. I just think it maybe get a little more complicated because there's a variety of different types of co-generations that we have. But generally speaking, when oil prices go up, we sell steam, hot water, electricity around the world at general pricing. We have been reluctant to disclose what the income is from our co-generation. We won't do that now. But I can tell you that when you see a $10-a-barrel move in energy prices, it's a pretty significant move for us in our EBITDA figure. So again, I think probably just generally speaking, the kind of rise that you've seen in, I guess, the ranking that we've just given you in our commentary. It should give you an idea of just how much impact the rise in oil in the fourth quarter made versus fourth quarter of last year.

Fair enough. And if I could just squeeze in one housekeeping question quickly for Charles. You mentioned shifting over the reporting results to U.S. dollars in the first quarter of '18. When should we expect U.S. dollars historical data to be available?

At the same time. You obviously need to have a comparative, clearly. Essentially, we expect that we will provide investors with the same level of visibility in U.S. dollars as they have today in euros. Certainly, prior 3 years in absolute stuff.

(Operator Instructions) Our next question comes from the line of John Roberts with UBS.

On your plans to improve technical rubber black, in the quarter where the volume's down in technical rubber, Carbon Black as well, like the overall Rubber segment or did technical rubber perform more like the Specialty Black segment?

I don't have that data in front of me right now. We could look it up and get back with you, John. And off the top of my head, I would say probably not. I mean, quarter-over-quarter, the percentage of technical rubber grew, I think you saw that, but your question is with the decline in overall Rubber was it disproportionately one way or the other or I guess, kind of pro rata. My sense is that what we declined in was not the technical rubber because where we backed away from capacity was not in the technical rubber area.

And the Orange closure is essentially plain vanilla.

Yes. And the Orange closure in the fourth quarter was commodity and materials. And again, I don't think that would be the case. I think we probably would have either maintained or grown technical rubber goods.

Okay. And then as a follow-up, to grow the technical rubber grades going forward here, technical rubber blacks, is that a conversion process like you're doing between Rubber and Specialty? Or is it much more easy to grow the technical rubber grades just by changing reactor conditions in your existing Car Black units?

It's a little bit in between. It's -- I would call it a little bit easier, okay, then it actually gets easier than what you'd consider a conversion to Specialty, but we cannot and most, I would say, suppliers cannot just simply change conditions. It will turn a few knobs, in the technical rubber. It requires significant changes in the reactor configuration to some extent feedstocks and downstream processing equipments. And so you're talking CapEx as well as some technology that we possess that allows that. So the conversion, like we've done for instance in one of our facilities in Texas, would be taking it towards Specialty but not all the way in order to be able to tackle these technical rubber. And the other part is just simply -- there are some very special types of products out there that we've talked about in the past. Those are improved treading resistance or improved abrasion where without sacrificing other properties of tires or Rubber, in general. And they require a certain type of, I guess, distribution of materials in order to do that, whether it's aggregate distribution or particle size or surface treatment or whatever.

(Operator Instructions) Our next question comes from the line of Connor Cloetingh with KeyBanc Capital Markets.

So I was just wondering, you mentioned with EBITDA margins in Rubber being the highest time record in the previous quarter. You think that's a good level going forward into '18? Or how -- what do you think the potential of those margins could be in that business, over the next couple of years?

And we would say 14.9% which was the highest we [wound] up in the company at Orion. As I commented in my commentary, I think there's still upside opportunity there of 15% EBITDA margin in Rubber Blacks is not really acceptable, I think, for this business. So what would we do for the rest of '18? I think right now, I would say, we've got some headroom still in '18 as these efficiency programs come in, and that's given a fixed price of oil, because you know this EBITDA margin can move around pretty substantially for the same amount of contribution margins, but the different changes in the price of oil. So going forward, maybe the best thing to do is to assume that we'll continue to have some improvements in the ensuing quarters over what we saw in the fourth quarter particularly because we've seen some decent pricing gains going before -- again, you've got to fix the price of oil to understand where that's really going to be. Charles, you got any additional comment on that...

Yes, I mean, it's the old issue that we're primarily focused on EBITDA -- adjusted EBITDA, because the percent EBITDA margin, obviously, is a function of the revenue line changing, because of the pass-through of oil prices. So we do and think there is a significant more profitability to come out of the Rubber business as it starts to and its cost of capital. It doesn't at the moment, clearly, and particularly in some regions. And we expect for the demand conditions that Jack outlined at the start of this call to continue to move us in the right direction to (inaudible) cost of capital. The percent margin development should reflect that subject to how oil prices change. So you know we could end up in a situation that we were still at a 14% margin but with a significantly higher EBITDA simply because of the movement in oil price affecting revenues.

All right, great. And then I was just wondering, with the new tire plants coming online in the U.S., could you give us any indication on how you're dealing with winning those contracts with potential new customers or do you think it's just benefiting the whole U.S. industry with higher utilization rates?

I think it's the latter, actually. I would like to say that we're in a pole position with several of these. But I think by the time it washes out, typically, the situation where the contracts are distributed according to capacity in the business. So I know there are certain players that have come to the U.S. where we're very strong, and we have been able to capture large positions with those new plants. The existing players in the U.S. that have added plants, we've captured positions there as well. But I think it would probably be (inaudible) for me to comment and say that we have a disproportionate amount of that because I don't -- I'm not too sure that, that would be the case.

Okay, great. And then I just have one last question for clarification. You're still running that plant in Seoul, correct? And when do you expect -- is that going to be until 2019 that, that could shut down? And you lose that volume?

That plant is fully -- will close midyear this year as we mentioned, we were able to secure a binding agreement to sell the property, which was one of the trigger points as to when we would actually bring it to a close. Our target all along has been to close the plant midyear 2018. We've been working on the opportunity to sell the real estate on the land given the fact that it's in the suburb in Seoul and quite valuable. So when we were able to conclude that binding agreement last week, we firmed up and confirmed to our employees as well that we would cease operation at the end of June of 2018. Unfortunately, at this point in time, given the work that we've been doing to transform the Korean production network, we're fully capable at this point of absorbing the production that we want to absorb. And we will be, of course, shedding the business that's the lowest margin business in that business according to our strategy all along for that project in Korea.

Okay, great. So you said it would be safe to assume that overall Rubber volumes might decline in the back half of the year with some of that business that you are shutting the lower margin business?

Yes, I think that's probably fair. I mean, it will certainly decline in that particular region. On the other hand, as I said a little bit earlier to an earlier question, we still have some gaps in the system right now that we're seeking. And given the dynamics in the global market right now, I mean, we've got an opportunity, we think to see a lot of material in other places and fill up these gaps in our capacity and locations. I mean, the U.S. has still got a little bit of capacity. South Africa has a bit of capacity. There's some here and there. And perhaps, we would be able to offset that. We'd do the challenge but that's the goal right now.

Thank you. Mr. Clem, there are no further questions. I'll turn the floor back to you for any final comments.

Well, thank you, everybody for your attention this morning. I hope that you've seen that going into 2018, we were doing that on the basis of a fairly solid platform in '17. But I really like what I see about 2018 is not only the situation that we've put ourselves in, positioning our network, positioning our production mix, strengthening our sales groups and so forth, but also just the fundamental industry dynamics that are forming up out there with the limitation of supply growth and the overall demand growth that's going on right now, particularly as these economies develop. Not only in the developed economies but also in the Southeastern Asian economies, the emerging economies, (inaudible) coming. We think there's a real opportunity for growth. We'll do that. We'll attempt to, (inaudible) time to occupy the majority of our capacity, as I mentioned a little bit earlier. But we will also be focusing as we went from '17 to '18, to pushing back on margins particularly in that Specialty area.

So thanks, everybody, for their attention. And we look forward to speaking to you about 90 days from now. Thank you very much.

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