Orion SA (OEC) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Orion Engineered Carbons Second Quarter 2018 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 second quarter 2018 financial results. I'm Diana Downey, Vice President, 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 this call.

Before we begin, I remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's 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 3, 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, everyone, and thank you for joining us for our second quarter 2018 earnings conference call.

For today's agenda, shown on Slide 3, I will cover our second quarter performance, key metrics and commentary on our Specialty and Rubber businesses.

Our CFO, Charles Herlinger, will then provide detail on our financial results and discuss guidance for the full year 2018. After that, I will come back and share with you our view of the markets, especially how we view the remainder of the year and the opportunities and potential challenges that lie ahead of us. We will then open the line to take your questions.

Referring to Slide 4, I will start with an overview of our second quarter performance. I'm pleased to report that by any measure, strategically, operationally and financially, we performed well and posted strong results for the second quarter, in fact, record results.

Adjusted EBITDA grew 26.1% to $81 million, surpassing our previous record of $76 million, which we achieved in the first quarter of this year. Earnings per share were up sharply to $0.88, which included a onetime gain of $0.19 from the sale of land in Korea. Excluding that gain, adjusted per share earnings rose to $0.69 from $0.40 in the second quarter of 2017. And in a continuation of the first quarter fundamentals, we grew volume in both segments while improving pricing.

In Specialty, we have been focusing on recapturing margin that had been eroded by rising feedstock costs. We accomplished this in the first quarter, but needed to continue with these efforts in the second quarter as energy prices continue to rise. As you will see on the detail, we pushed gross profit per ton above the first quarter's results due to good work on price management, a tailwind from foreign exchange and some cost absorption from volume improvements. It's really a great effort by the team to combat these rising raw material cost in that part of our Specialty business, which is not indexed to feedstock.

The focus of our Rubber business has been to take advantage of strong global demand in all of our regions, while improving mix in our operating efficiencies. The higher contract pricing we put into effect in 2018, along with volume gains and efficiency improvements, substantially improved our first half of 2018 results relative to the same period last year. Again, we consider this a solid quarter and first half, well executed by this team.

As a part of our plans to improve our production network, we completed the footprint reconfiguration in Korea ahead of schedule. We sold the real estate occupied by the plant, which we closed in the suburbs of Seoul at a price in line with our expectations, but withdrew from some lower margin rates in Korea as we began to shut down lines at this facility. Thus, sales were lower in the second quarter versus the first, but we entered the third quarter with a better margin and mix profile and a more muscular production footprint in the Asia Pacific region. Much effort went into managing this transition and I'm pleased to say that it was accomplished without compromising customer relationships, with the cooperation of our Korean team and without a recordable injury to the many employees and contractors that worked at those sites. Please also refer to our overall safety achievements along with other stewardship matters in the appendix for this report.

So in summary, we're pleased with the performance in the first half of this year. The markets had held up and our execution on critical matters in both segments has been good. We've done a good job of taking full advantage of both improving global economic conditions for our products and favorable supply-demand dynamics, while devoting more capacity to higher margin products.

Turning to Slide 5. Overall volumes grew 3.4% to 275,600 tons (sic) [275,600 metric tons], with both segments contributing to the growth. End markets remain strong in all the regions of the world and our industry segments. Adjusted EBITDA, as I mentioned earlier, hit a record $81 million, representing a 26.1% increase compared to the second quarter of last year. This reflects the volume gains in both segments, improvements in pricing and mix as well as the benefit from foreign exchange tailwinds. Compared to the first quarter of this year, adjusted EBITDA is up 6.8% as pricing, energy usage continue to improve and offset lower quarterly volumes and foreign exchange, which sequentially turned into a headwind for the business.

On Slide 6, we show regional production coverage in volume mix, which remained fairly stable compared to last year and to the first quarter this year. Our technical rubber grade volumes continue to grow as a percent of total rubber and now reached 36.7% compared to 34.9% last year.

Moving to Slide 7, let me comment further on our Specialty business. Globally, we grew with the market driven largely by gains in the Americas and Asia Pacific. Demand remained strong for key end markets in coatings, polymers and speciality applications. Revenue grew 16.6% to $142.7 million, reflecting volume gains, the pass-through effect of feedstock costs on the portion of that business, which has indexed pricing and a full quarter of base price increases on that part without indexing. Foreign exchange also is a tailwind relative to the same quarter last year.

Gross profit per ton reached $856, representing an increase of $94 per ton or 12.3% over last year's second quarter and an increase of $75 per ton compared to the first quarter of 2018. In addition to the favorable impacts of pricing, volume and foreign currency, we began to fill out our revenue capacity in Korea with the high-end products. We also made progress on the project to add the additional Specialty line in Italy. While we were pleased with these per ton levels, rising energy prices and the relaxation of foreign currency tailwinds are expected to bring down gross profit per ton from these record levels closer to those that we saw in the first quarter of this year. In summary, it's a great quarter for Speciality in both per ton performance and overall adjusted EBITDA.

Slide 8 gives a few more details on the second quarter results for our Rubber business. Strong demand continued in all regions, and in many areas, exceeded our capacity especially for certain grades. Overall, volume was up year-over-year by 3.4% with only South America and China showing no growth due to the trucking strike in Brazil and an extended turnaround we had in Qingdao. [All the] regions were operating at high utilization rates. Higher energy prices raised our cogeneration income and we moved further on our objective to improve mix with continued penetration into the technical rubber goods market. Spot prices were raised during quarter by over $100 per ton, and while this segment of our sales is small, we were successful in capturing the full amount of these increases on spot demand.

Gross profit per ton grew 22.9% on the strength of base price increases, mix improvements and favorable foreign exchange, offsetting some headwind from feedstock differentials. This gross profit improvement flowed through to a 34% increase in adjusted EBITDA per ton, up 5% sequentially. A healthy supply/demand dynamic is also creating favorable conditions for contract negotiations for 2019. I mentioned in our last quarterly call that a number of our customers had engaged in contract discussions earlier than in past years. These negotiations are continuing with even some deals already being closed. At this time, we remain optimistic about the favorable supply/demand environment and point to Slide 9, as representative of the tightening global situation.

We are preparing for the impact of the pending IMO 2020 regulations on our feedstock costs. Even though these new regulations on fuel for oceangoing vessels do not take effect until 2020, markets are already anticipating the price changes that will occur when shipping moves to very low sulfur fuels. The spreads between high and low sulfur heavy fuel oil will widen and this will have a carry-on effect on our feedstocks. We've included Slides 10 and 11 to explain our view of these changes in high versus low sulfur heavy fuel oils. We've been working with our customers to ensure that our pricing formulas are flexible enough to accommodate these changes as we move into next year, when we expect pricing to respond to the situation.

I'll now turn the call over to Charles, who will give you more details about our financial results.

Thanks, Jack. Good morning, everyone.

Turning to Slide 12 on our consolidated second quarter results. Overall volumes increased by 3.4% or 9,000 metric tons from the prior year's quarter to 275,600 tons (sic) [275,600 metric tons] reflecting stronger volumes in both segments, particularly within NAFTA, Europe and South Korea. Revenues increased by 18.8% to $391.6 million in the quarter compared to $329.6 million last year, primarily due to the pass-through of higher feedstock costs, positive foreign exchange rates' translation impacts, increased volumes, increases in the base selling prices and mix impacts.

Our overall contribution margin increased strongly by 19.5% in the second quarter to $155.1 million versus $129.8 million in the prior year's period. As the top waterfall chart on the right-hand side of the slide shows, the increase in contribution margin includes positive effects from foreign exchange rate translation, pricing actions, feedstock and energy impacts as well as volumes.

Referring to the second waterfall chart on the right-hand side, which shows the development of adjusted EBITDA, the contribution margin increase in the quarter was partially offset by some additional fixed costs and by negative foreign exchange impacts on our fixed costs. As a result, adjusted EBITDA increased by 26.1% to $81.1 million. Our adjusted EBITDA margin of 20.7% increased 120 basis points versus last year's second quarter, reflecting a higher adjusted EBITDA.

The waterfall chart on the bottom right-hand side of the slide analyzes net income development, which showed an increase to $52.7 million versus $18.4 million in the prior year's quarter, as a result mainly of the increase in adjusted EBITDA, a gain on the sale of land in South Korea and a reduced effective tax rate, which is in part related to the taxation of the land sale in Korea as well as reduced finance costs.

Now turning to Slide 13, which shows our cash flow dynamics with our key balance sheet metrics as of June 30, 2018. For the first half of 2018, we generated a strong $46.6 million in cash from operations, despite the cash consumption impact of $62.3 million associated with higher raw material costs, flowing through our networking capital. This cash generation, together with the proceeds of $64.7 million from the sale of our former plant site in Korea as a result of the successful conclusion of our consolidation project, comfortably supported our CapEx investment program. Other uses of cash over the same period include interest payments, required debt repayments and dividends.

As a result, our cash position at the end of June 2018 was $73.5 million in line with the beginning of the year. The company's noncurrent indebtedness as of the second quarter was $664.4 million, with net debt at $595.7 million, taking current term loan B and local debt into account, which represents a leverage ratio of 2.1x LTM adjusted EBITDA compared to a leverage ratio of 2.3x at the end of last year.

Slide 14 presents our revised 2018 guidance and further cash flow detail regarding 2018 base business requirements and capital allocation. We are raising the floor of our adjusted EBITDA guidance for 2018 to be in the range of $285 million to $300 million with a weighting above the midpoint of the guidance range, assuming exchange rates, feedstock costs and customer demand levels are consistent in the end of the second quarter. This upward revision of our guidance reflects our strong performance in the first half of the year, tempered, however, by both the lack of foreign exchange translation tailwinds expected in the remainder of 2018 as well as the impact of the timing of feedstock cost increases, trimming back the very strong margins experienced in the second quarter in the Speciality segment.

With the performance in the first half of 2018 as a backdrop, and with a positive expectations we have for the future development of the business, our thoughts with regard to capital allocation, that is to say, relating to dividends, our target leverage ratio and our opportunistic buyback program, remained essentially unchanged, although we will keep the focus on the development of comparative leverage levels in the chemical industry as a whole, while we continue to focus on executing our CapEx program on high value-added bolt-on investment opportunities related to our Specialities business.

In terms of other areas of guidance, we continue to expect base capital expenditures for 2018 to be approximately $100 million, before considering investments associated with the South Korean capacity transfer and before EPA-related CapEx. As for the remainder of our guidance metrics, we expect depreciation and amortization to be approximately $100 million, with our tax rate expectation for 2018 on pretax income at around 32%. We continue to expect conversion of our financial statements from IFRS to U.S. GAAP, to take place by the end of 2018. While both a switch to U.S. dollar reporting and to U.S. GAAP accounting are important milestones on which we have progressed well, redomiciling our top company to the U.S. remains an important open task in order to be eligible for inclusion in the relevant U.S. equity indices. And accordingly, we continue to explore various parts to achieve establishment of a U.S. TopCo in a tax-efficient manner.

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. Turning to slide 15, we saw a strong business momentum in the first half of this year, which we believe will continue for the remainder of 2018. While we do not expect to see the tailwind of foreign exchange translation experienced in our first half to continue into the second, we do see demand and improving operational efficiencies continuing. This encourages us to tighten our guidance and begin to look even beyond the second half into the following year, where we believe this market strength and our strategic focus will benefit Orion. We have included Slide 17 in the appendix to restate those strategic actions we are taking to drive value creation.

Our margin recapture initiative has served us well. Rubber demand remained strong in a very tight supply environment, with little in capacity coming online in the near term. Our investments in Korea and in Italy, in [midlines] and deep bottlenecks in Germany will support continued growth in specialties at above market rates. Efficiency gains will continue as a key component of our deployment of cash generation, and we are encouraged by the early results we have seen in improving our contract pricing in 2019.

While I'm confident in our execution capabilities and encouraged by the general economic news we hear, we are monitoring the talks of tariffs and trade restrictions. So far, we've yet to see any direct impact on our business from the recently announced tariffs. But as a global concern, we have to be prepared to respond to these matters if this becomes a drag of global economies. That being said, if oil prices continue to move sideways, foreign exchange stays more or less steady and assuming demand remains strong, as strong as it was in the first half of the year, we are well positioned for a solid 2018.

As we look out past 2018, with supply expected to remain constrained and demand expected to move up, we feel good about the market dynamics for 2019. Even with some investment in capacity expansion and our own debottlenecking initiatives, supply/demand dynamics are not likely to change in the near term in a meaningful way. All these factors lay the groundwork for continuing the strong profitable growth of Orion.

Operator, please open the lines up for questions.

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

Looking at the guidance, so if I look at the first half of the year, you earned $157 million of EBITDA, and the guidance implies the back half of about $128 million to $143 million. So it's a pretty decent size -- a step down for -- I don't think there's a lot of seasonality in carbon black. And I realize that FX is come down a touch year. So wondering if you can maybe size up for us, again, the sensitivity to FX movements now that you're in U.S. dollars? I know it's changed a little, obviously, compared to when you were reporting in Euros. And is there anything else that would cause the EBITDA to slow down in the back half of the year like that? Just wondering if you could help frame up why things -- given the positive momentum, the spot pricing, the solid volumes, I think the Korea consolidation is going to be a bigger benefit in the back half. Why would we see a little bit earnings slowdown to that degree in the back half?

Yes, I mean, Kevin, just as a -- hi, it's Charles here. Just as a background comment, what -- we are signaling awaiting towards the higher end of the guidance range. I made that statement upfront. You asked about the FX sensitivity. As our currency is changed by 5 basket of currencies, we deal with change by 5% up or down. It impacts our adjusted EBITDA on an annualized basis by about $12 million or $13 million. So that's the sort of magnitude if we -- the change we're playing with on a yearly basis. The fact is as you point out, FX, we do expect that the margin level -- in our prepared remarks we pointed to -- on the Specialty side, not quite as -- not being quite as high as in -- particularly in the second quarter of 2018. That is certainly a factor. There's probably a bit of seasonality as well to be expected, not too much to your comment, but those are the main factors. And the fact that we do like to be relatively balanced in terms of our guidance. And not over (inaudible) when we've got half a year still to go.

Sure. Makes sense. Okay. And then, Jack, you mentioned -- maybe moving to the Rubber side of the business, that the -- it sounds like the spot pricing initiatives that you put in place are having success. I was wondering -- I know you have increases in North America and Europe. Wondering, if you could give some color on -- it sounds like those are going quite well. Remind us how -- I know spot's very small in North America, maybe a little bigger in Europe. But how big are these spot business for you? And how much of an impact can that have in the back half of the year as those benefit you? And also, you mentioned some contacts are finalizing. So I'm wondering if you can give some -- I'm sure you can't give too many specifics, but if there's any read-throughs here from how well the spot pricing's going. If there's any read-throughs here, how we can think of contract pricing for next year?

Yes, Kevin, I don't want to overplay that spot issue too much because I think, probably, as much as anything it's just an indication of what's going on in the marketplace out there. As we've said in the past, our spot business is reasonably small. But there is a few pieces here and there. And what it does is, is it gives you an indication of just how tight the industry really is. I mean, if you put a spot price out there, well over $100 a ton and you pick up a piece of spot business, whether it's small or large, and in that case, admittedly, it is small. And it's small in both regions, actually, both Europe and the United States. It is an indication of the tightness. So I really call it out for that purpose as much of anything. And -- so given the -- and moving to your second question about contracts, I made the comments in the prepared remarks. I would just like to say that I don't think I can go a whole lot further than what I went there, other than we are encouraged by what we see right now. It did, as we said earlier, start earlier than what we thought. In fact, some of the closures, they've occurred much earlier than we've seen in the past. I won't comment on the extent of those other than they've come in, more or less, kind of in line with what we expected going into 2019.

Got you. Okay, completely understood. And last question. Maybe just comprehensive to look at that Korea consolidation. Wondering if you can update us -- is that benefiting Specialty volumes at this point? And I think you mentioned maybe the back of the year would see more. So what's been the contribution there to Specialty volumes, if any, so far in the first half of this year? How much of that add in the back half? And conversely, on the rubber side, how much has that been a drag on the volumes? And what about the EBITDA contributions from that consolidation? Has that started to show up here in the first half of the year and what type of benefit should we see in the back half?

I'll comment on some of the volume and commercial matters, and Charles can comment on some of the impacts associated with fixed costs and just the overall deal, which we were very, very pleased with. In fact, as you know, and I think we called out, we added a line when we made this conversion. We closed that smaller plant. We made a total conversion of the southern plant. Made it a lot more efficient, made it a lot more capable of taking on a wide variety of specialty grades, while adding a line that delivers highly specialized materials as well. That's in the fill-out stage right now. So overall, quite pleased with that. We don't go into that specific level of how much of that added and so forth in that particular region. But it certainly contributed to the overall growth because Asia Pacific is clearly a real growth area for us right now. So all in all, very good. I think I mentioned in my remarks that volumes had fallen in rubber in Asia Pacific, and of course that was planned. We were essentially giving up some of the lowest margin business that we had in that region, had to, because we took out over 40,000 tons of capacity. And the plan all along was to withdraw from roughly 40,000 tons of the lower margin business and preserve all of the rest of the business that we had. And I'm pleased to say that when you do a transition like that, sometimes something can fall off the plate on the way from here to there. And I'm very pleased to say that the team did a great job in making those transitions, and we were able to preserve the so-called good stuff as we went forward.

Yes, and so the fixed cost, Kevin, it will probably be about $3 million and certainly no more than $4 million in the second half of this year pick up on the fixed cost. To annualize, double it.

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

I guess, just couple of questions. First just on the tax rate. What do you think is the normalized tax rate going forward? Is it going to be 32% or can you do better than that? And...

Sorry, carry on.

Go ahead. No, okay, go ahead.

I think for the remainder of this year, it's going to be about 32%. We might do a little bit better than that, Laurence. And I think for a number of reasons, I do expect that our tax rate will come down from that to more towards the 30% range, maybe in the longer term even beneath that. And the reasons for that are as we execute some strategies to take more advantage of the U.S. tax rate in contrast to the rest of the countries that we deal with, that would certainly be a sensible thing for us to do. And that may be in tandem with the redomiciling that I referred to in my prepared remarks. But to give you a feel, I think directionally, an improvement in the tax rate, and we may even beat the 32% that we've signaled for this year. But we'll have to wait and see.

And just to be clear, it's 32% for the year or it's 32% for the back half of the year?

32% for the year.

Okay. Perfect. And secondly, on the IMO sensitivities or how this can play out. You mentioned that you are -- you think you'll be able to get your contracts adjusted to get a pass-through any volatility. Have you had to give anything up to get the right flexibility or how -- or is it just because the market supply/demand balance is so tight that we don't -- we should not worry about you getting caught on any of the contracts?

Yes, the fact is that there's a lot of uncertainty right now about IMO. We -- as you can imagine, we spent a lot of time speaking with refiners, people that deal in this, some external consultants, just to understand as best as we can. And we've come away with the belief that there's just not really a settlement yet as to where this is going to go. Except for the fact that, generally speaking, directionally, high sulfur material is going to get more -- it's going to get cheap. Low sulfur material's going to get more expensive. The direction we know, the magnitude is very difficult to understand right now. So we have to make sure that we've got the flexibility in these contracts, literally, probably, starting midyear next year because that's what's signaled right now in terms of the spreads beginning to widen. We have to make sure that we've got those kind of flexibility. But in order to nail it down precisely, becomes a bit harder. There are some new indexes that are coming into play at the beginning of next year. But those indexes don't exist right now. And we need to be able to watch those and see whether or not those represent a reasonable surrogate for our feedstock costs. But the fact is, it is a reasonably tight market as we've said before. Having said that, it makes these discussions a bit easier. But the fact is, I think, we as a company and the carbon black industry as a whole, has attempted to make sure that, at least in the Rubber business with the big tire customers, that there is the concept of pass-through. And so we get a lot of, I guess, cooperation in the notion of pass-through. They just want to make sure that it's transparent and that it's fair. And that's fine with us. But right now, the transparency does not yet exist in this situation. Only the direction of what we think is going to occur out there.

And then just lastly, the tire volumes appear to have been weak -- seemed to be weaker than expected this summer, but your volumes have held up pretty well. Are you at all concerned about any form of an inventory build or if that's -- or is the [delta] explainable just by mix changes in the tire market?

The supply chains moved around quite a bit, Laurence, but sometimes these things are very dependent on sell-in and sellout trends at distributors, and it's part of the supply chain that we just don't see. Our volumes have held up reasonably well, maybe just a little bit less in some locations, not for us, at least in the U.S. But for the most part, we don't really sense that slowdown right now.

(Operator Instructions) Our next question comes from the line of Mike Leithead with Barclays.

I guess, first on Rubber Black. Can you just touch on where you think operating rates are globally in the industry? And how we should think about the pricing power in this business as things should continue to tighten over the next couple of years?

Well, we certainly had good visibility on our operating rates, and I can comment on those. And I can give you a general impression of where I think the operating rates are for the industry. Europe, as we have said, I guess, maybe for the third or fourth quarter continues to be very full right now. There -- the demand has been steady, operating rates are high. Our operating rates are plus 90% in Europe right now. And it's our belief, at least, that, that's the same operating rate for the industry just given our feel of what happens when a particular supplier or whatever has a little bit of a problem, you can get a sense of whether the business is full or the industry full or not. So having said that, I'd say Europe, for us, plus 90%, and for the industry, probably the same. Moving over to our main market, the United States, there's a bit of a -- maybe not quite as tight, but it'd be not quite as tight applies really to the category of the products. As you know, the 2 large parts of the rubber black market are the tread grade and the carcass grade, or what we typically call hard and soft grades. From our perspective right now, the hard grades sold out and that's the primary demand of the tire companies. They buy soft grades, but not at the level of the hard grades. But I would say right now, tread grades, for us, are very, very high utilization rates, over 90%, and probably equal to that, I would say, in the industry. Soft grades, again, it's speculative on our part. We're probably in the high 80s. And my guess is that's probably where the industry is as well. There may be some grades of those, some of the special types of grades that are sold in those categories that are also sold out. Korea remains fairly high for us. We're -- of course, we closed capacity, so that tightened up anything that we had there. We think probably that market is fairly strong right now but stable. The Korean markets are fairly flat with maybe a little bit of growth but it's export-oriented right now, and I think they're probably in a bit of a battle with some of the other exporters in the Asia Pacific region. Moving over to China, we're running very full, our sales in China. There's not a lot of really great visibility there, but as I said in the past, China tends to be more or less bifurcated with the modern, western-type producers such as ourselves, we think are running at a fairly high utilization rates than some of the less sophisticated players over there probably running at fairly low operating rates. And that kind of surrounds the major parts of our industry and probably captures the biggest part, my guess, maybe India. From all indications, India given their operating rates right now and the fact that they are importing a lot of material, they seem to be running at very high utilization rates, so much so that they have to import material in from outside of the country. And that provides, as we've said repeatedly, this supply/demand dynamic, which is favorable for pricing. And so we've been able to initiate and engage in these pricing discussions for 2019 much earlier and have had what we consider success. But I'm not in a position really to comment on the level of that at this point.

Great. And then going back to IMO 2020, you guys laid out some nice slides there. I guess, some plants should benefit from cheaper high sulfur feedstock. Others may be impacted by more expensive low sulfur's feedstock. But, I mean, high level for investors who aren't as in the [weeds] as some of the nuances, based on the mix of high sulfur and low sulfur feedstock mix in your system, how should we think about these kind of offsetting themselves? Or I guess, if this regulation came into effect tomorrow, I mean, what would be the impact to your business based on your feedstock mix?

Yes, I think it's a really good question. It's one we've been examining as well. Public information exists out there about the feedstock limitations for different plants around the country. When we look at ours and we look at the industry, we don't consider ourselves disadvantaged at all. We have what we consider a fair degree of flexibility. So I think, in terms of Orion, we're okay, maybe a little bit better than average for the entire industry in United States.

Great. And then just one quick final housekeeping one. When should we expect GAAP financials to be released? And will we get 3 years of historicals with that?

Most probably with our annual filing at the end of this year, latest, which just seems to be the most efficient way of doing it. I can tell you upfront that all our analysis to date, Mike, suggests very little impact on the reported results. Meaning that if we presented you with the -- for example, year-to-date 2018 financial statements in U.S. GAAP and U.S. dollars, you would barely, if at all, notice any difference to what we presented today. And that's the current plan.

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

You're now up to 36% of your rubber black as technical rubber grades. Is there a limit to what your plant can make? Can you go to 50%? And how easy is it to switch from tire grade blacks the technical rubber blacks?

It's not that easy, John. We don't have technical limitations that would prevent that. It becomes more of a matter of bringing the substance to that level and having them appreciate the value that premium product like that could provide. But to the technical rubber that we sell is actually outside of the tire industry, it's in mechanical rubber goods area, where we have very good products and a lot of nice positions there. There's a lot of upgrading that can occur around the world where you take people that are using inferior products, lower-priced products, they have higher scrap rates and that type of thing, and if we can move them to our higher purity, more consistent material. But sometimes there's a bit of a convincing that has to go on in that sense. But we've been able to do that, as you can see from this climb in technical rubber grades that we've been talking about for the last several quarters. So our view is, we can move up to 50%, it's just going to be a matter of time and how quickly we can get there. But it's a major effort on our part if you can imagine.

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

So I was just wondering, it looks like in your Specialty business, you're able to get some good price increases just in a matter of 1 to 2 quarters, Just looking sequentially from 1Q to 2Q with your margin improvement, how much of that was your -- you think was the price increases and how much of that was the FX benefit that you had talked about?

Well, it's mostly price. The -- I saw -- or actually, just let me give you a little better of a feel...

And we're talking sequentially, right?

You're talking, Connor, Q1 of '18 and Q2 of '18?

Yes, sequentially.

Yes, yes.

Yes.

Yes. It's -- yes, it is very much a -- the 3 quarters, if not more, of that is not related to FX.

Okay. Great. And so that should be pretty sustainable over time? Imagining...

Yes. Yes, it should be. In the prepared remarks I did refer to the fact that -- I think Jack did as well, that the timing of some of our feedstock costs between Q2 and Q3 and Q4 means that we don't necessarily expect to sustain the gross profit per ton margins that we've seen in Q2 as we move into Q3. They will still good, but not quite at that level, most probably.

All right. Great. And then I was just wondering if you had any thoughts or comments, now that we've seen some larger M&A in the carbon black industry? I know you've talked about the desire to do the smaller bolt-ons, but is there any interest to participate in maybe larger M&A, as the industry appears to be moving towards some consolidation?

Well, of course. To the extent it makes sense. We have what we consider as a very, very good business as it is today, a sustainable business as it is today. But as we [called], participate in these kind of discussions about whether there are certain combinations, certain ways we can come together. And our focus has been, of course, some of these smaller bolt-ons, particularly in the Specialty area. But we certainly would entertain, and frankly, have entertained in the past, opportunities to look at bigger opportunities like that. But that's about all I would be willing to comment on.

Connor, just let me correct something that I mentioned in the first part of your question. The -- if you're looking at, which your question was directed to, the shift from Q1 of '18 to Q2 of '18 rather than Q2 of '18 to the corresponding quarter last year. The FX effect on speciality actually was slightly negative. It was actually a headwind. So that the -- if you look at the development of the margin on Speciality, Q1 of '18 to Q2 of '18, it's really a very much a price-driven story.

(Operator Instructions) Mr. Clem, it seems there are no further questions. I would like to turn the floor back to you for any final comments.

Very good. Thank you very much, and we appreciate all of -- everybody's interest today. I'm really proud of this first -- or this second quarter performance and this first half performance. I think the business has performed well. We only have markets working for us right now. But moreover, I think the execution of the business to take advantage of those market conditions has been very good. It's good to get this situation in Korea finally behind us. It provides a really nice platform for us in Asia Pacific, which is an area that we believe in, we'll continue to grow in. And we look forward to the second half of the year. Let's just keep our fingers crossed, the markets hold up, that there's not some of the issues associated with these trade wars and such that, that those subside, and that we can move along very nicely as we have so far this year. So with that, I'll close and thank everybody for their attention. We appreciate it. Thank you.

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