Orion SA (OEC) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Orion Engineered Carbons Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Diana Downey, Vice President of Investor Relations. Please go ahead, Ms. Downey.

Thank you, operator. Good morning, everyone, and welcome to Orion Engineered Carbons Conference Call to discuss third quarter 2018 financial results. I'm Diana Downey, Vice President, Investor Relations.

With us today are Corning Painter, Chief Executive Officer; and Charles Herlinger, Chief Financial Officer.

We issued our earnings press release after the market closed yesterday and have posted a 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, November 2, 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 Corning Painter.

Thank you, Diana. Good morning, everyone, and thank you for joining us for our third quarter 2018 earnings conference call. We appreciate your time. Before starting with today's agenda shown on Slide 3, I would like to first introduce myself formally to everyone listening who I have not yet met and give some background as to why I decided to join Orion Engineered Carbons. Then I will discuss my vision for Orion and opportunities to build on our prior successes before getting into our third quarter performance. 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 some closing thoughts. Then we will be happy to take your questions.

I'm extremely excited to join the Orion team. Like many of our investors, I chose Orion because it is a company on the move, has a clear strategy and I saw a substantial value creation opportunity here. This has been a seamless transition with Jack Clem joining the board and continuing to play an important role in the strategic vision of the company.

Orion's strategy focuses on the specialty and high-margin technical grades of carbon black. We've manufactured these materials and placed them in these demanding high-value markets. Said another way, carbon black is our core product. We are experts at making it, and we aim to sell it at the optimal combination of best price points and volumes possible.

It's a simple and effective strategy. Jack, Charles and the team have done a great job advancing the strategy, but I am thrilled to see the amount of runway that remains in front of us. I believe there remains untapped market opportunities and potential in a number of different areas, including the addition of new high-value applications for specialty carbon blacks, going deeper in geographic markets where we already operate and by expanding in new markets or markets where we are yet to fully develop the beachheads that have been established.

Please turn to Slide 4. The acquisition we announced yesterday of the acetylene carbon black manufacturer, known as SN2A from LyondellBasell Industries, is a great example of incremental benefits to come from manning a new application and material to our specialty portfolio. Acetylene carbon black is an ultrapure, highly electrically and thermally conductive premium specialty material. It is used in several applications, but our strategic intent is to use it to enter the lithium-ion battery segment. For a little more than $30 million, we nearly got a world class, well-established manufacturing plant that would've cost a similar amount to build, and we've got a skilled workforce.

The plant is already operating at a good capacity utilization, but with upside for additional volumes. SN2A has an excellent track record of operational and technological successes, and we are very excited about SN2A, the lithium-ion battery opportunities and other highly conductive applications made accessible with this acquisition.

I think there can be confusion regarding the role of carbon black in batteries. So let me further explain the market dynamics and opportunity this transaction presents to OEC.

There are 3 primary battery segments in the market. The first segment is dry cell technology, which SN2A supplies with acetylene carbon black today. The second segment is lead-acid and advanced lead-acid batteries, which we supply with Specialty Carbon Black. The third segment is lithium-ion batteries, which are an exciting opportunity. Lithium-ion batteries are used in increasingly broad set of applications, including, of course, in transportation and mobility, where we see a big opportunity in the future.

As is the case with many early-stage specialty chemicals, carbon black for these batteries is a relatively small niche market today, but we expect it to grow rapidly. Beyond that, there are other markets where this premium material can enhance our customers' products.

In terms of going deeper in geographic markets, our Specialty business in North America has yet to reach its potential in terms of penetration and margins. By investing further in technical sales and support personnel and potentially building up customer technology support in the U.S., as we have done in other regions in the past, I believe we can drive both operational and financial improvements. We will take the learnings and infrastructure that have helped drive our Specialty business in these other regions and now also focus and implement them in the U.S.

There are also regions where we have been recently active, but remain small relative to the market demand, with China being the most significant opportunity. Today, while we are a major importer of premium products into China, we produce only locally about 75 kilotons per year of carbon black in a roughly 5,000-kiloton-per-year market. The China specialty market, powered in part by environmental regulations, continues to grow rapidly. Faced with this opportunity, we need to maintain and even grow our share by adding capacity locally. We will be careful and consider modest investments to ensure we remain a viable player in China. It is my view that a high-return investment in specialty and high-end rubber blacks in the range of 100 to 150 kilotons per year will be easily digestible and provide an excellent opportunity for Orion.

After some time in the lead role, I would like to share some observations since joining the company. I have been impressed with the management team, their knowledge of this industry, commitment to excellence and drive. I have been impressed with our knowledge of customer applications and ability to support them. However, I do see an opportunity to build this out more consistently in key markets. Having visited half of our plants, I have seen firsthand the carbon black manufacturing is a harsh process, involving high temperatures and a corrosive tail gas. I've been very impressed with our plant operating teams who run these plants. There is an opportunity to invest in our plants to support our customers and assure we are positioned for growth. Going forward, I would anticipate implementing a single-digit millions increase in plant maintenance CapEx, which would pay off in improved reliability, quality and efficiency. Ideally, these investments can be combined with debottlenecking.

After safety, capital allocation is one of the most important responsibilities of the CEO, so I would like to speak to this in more detail. Our priorities are outlined on Slide 5. They are, returning value to our shareholders via dividends. Orion has a strong record of a solid and stable dividend, and there is no change to our earlier stated position on the strategic use of cash. Maintaining our facilities and complying with environmental standards. Investing in growth through targeted expansions. Mergers and acquisitions, with bolt-on acquisitions like SN2A being an excellent example of finding high-value carbon black applications to enter strategic high-growth markets. Share buybacks. And maintaining our targeted debt ratio of 2 to 2.5x EBITDA.

There is a time and a place for buybacks when utilized effectively. I am very pleased that we have been able to take advantage of the recent volatility to buy back shares at what is clearly a bargain price not reflective of Orion's value. I have fully supported this, and I am pleased that we've doubled our capacity of buybacks to $40 million.

Please turn to Slide 6. Orion has covered a lot of ground so far in 2018. We've advanced or accomplished each of the items on the slide and are looking to close the year on a strong note. I would like to thank the entire Orion team for their hard work and dedication to achieve these milestones, and I would particularly like to thank Jack Clem for his leadership to Orion and assistance to me.

Now turning to Slide 7 and 8, I will discuss our third quarter performance. I am pleased that Orion reported a strong quarter. Overall, despite lower year-on-year volumes due to closing a facility in Korea, we achieved double-digit growth in our key operating metrics.

Adjusted EBITDA grew 13.2% to $73 million. Earnings per share were up $0.40, and adjusted earnings rose to $0.51 from $0.38 in the third quarter last year.

These strong results were seen across the entire rubber segment, which delivered a historic quarter due to solid execution and stronger spot pricing supported by a robust environment. Excluding the impact of the closure, rubber volumes increased by 2.7%, reflecting a strong demand environment in all regions. Total volumes were down by 2.3%, mainly due to the Korean closure, which was targeted at improving operational efficiency and eliminating less profitable rubber grades.

As good as these results were, I expect 2019 to be even better. Pricing negotiations for 2019 are essentially complete and will deliver strong pricing gains despite the fact that a large rubber customer is covered by a multiyear contract that will not reset until 2020.

Our outlook for 2020 pricing is even more robust. We've elected not to lock in 2020 at 2019 prices with customers because we believe the fundamentals will continue to improve. Our rationale can be seen in the market, taking the U.S. as a good example. Carbon black prices in the U.S. have been below reinvestment levels for many years and remain so today. Reinvestment prices have increased even more as we all know and saw enhanced environmental controls. We believe prices have to rise substantially further before new capacity is brought on. We don't think imports will change this picture. Imports have not been a significant factor in the past due to the quantities required and logistical costs. We don't see that changing. Given these dynamics, we believe the pricing environment will be strong for several years and do not expect there will be a rush to add new capacity.

We see strong demand in the rubber market, buoyed by the large replacement tire market. Despite any pockets of weakness in regions like China, capacity remains constrained, and we will likely be sold out on many production lines in 2019.

Profitability in our Specialty segment was in line with our expectations as the rise in oil costs experienced this summer moved through our P&L and brought per-ton profits more towards equilibrium after an exceptionally high second quarter result. We've seen a slight decline in Specialty volumes in Asia, which we believe is a mix of customers adjusting their inventories and, to some degree, production rates in response to recent trade-related events. We also saw some slowing in engineered plastics demand in Europe, although other segments such as polymer pipe and wire and cable demand remains solid worldwide.

We are pleased with the performance in the first 9 months of this year. We are doing a good job of taking advantage of the global economic conditions and favorable supply-demand dynamics while devoting more capacity to higher-margin products.

Moving to Slide 9. Let me comment further on our Specialty business. The Specialty business performed as expected as revenue grew 7.3% to $134.2 million, reflecting the pass-through of higher feedstock cost to customers and base price increases, partially offset by lower volumes, production mix and foreign exchange rate translation effects.

Gross profit per ton was $745, down $38 per ton or 4.8% from prior year. As I said earlier, Specialty volumes declined, reflecting we believe a mix of inventory destocking and, to some degree, customer production rates. We also prioritized high-margin rubber carbon blacks versus lower-margin, more competitive specialty volumes in our production slate in certain regions.

Slide 10 gives more details on the record third quarter results for our rubber business. Overall, rubber volume was down year-over-year by 2.1%, reflecting the plant closure in South Korea that we mentioned earlier. Excluding this, they were up 2.7%.

Gross profit per ton grew 44.9% due to mix and base price increases, the timing between quarters of pass-through of feedstock cost and increased cogeneration income. This gross profit movement flowed through to a 63% increase in adjusted EBITDA per ton. Clearly, our Rubber Carbon Black business is performing well. Fundamentally, manufacturing capacity for tires and rubber mechanical goods has been growing more rapidly than carbon black capacity, and the implication of this is playing out in the marketplace. The U.S., European and Brazilian rubber black markets are strong. What happens in the China automobile market is less important to us given our footprint and mix of products there. Also, keep in mind that replacement tires provide stability since they account for more than 70% of tire market demand.

Slide 11 reflects our view of the impact of IMO 2020 on high and low-sulfur heavy fuel oils. It is our view that the 0.5% sulfur specification will be implemented on schedule in March 2020. In summary, there will almost certainly be a higher demand for low-sulfur fuels driving up the cost of this material and having the opposite effect on higher-sulfur fuels. We believe all carbon black manufacturers in regions that use petroleum-based feedstocks will see these changes. We are positioning our contracts to pass through most of this impact. That being said, we will strive to create increased value with this disruption.

Slide 12 summarizes our view of world markets. In the interest of time, I'm not going to read through this slide for you. The key point is that the healthy supply-demand dynamic created favorable conditions for contract negotiations for 2019 and beyond. The contracts are well advanced in the process as compared to previous years, and we continue to remain optimistic about the favorable supply-demand environment in our key metrics.

I turn the call over to Charles who will provide more details about our financial results.

Thanks, Corning. Good morning, everyone. Turning to Slide 13 and our consolidated third quarter results. Overall volumes decreased by 2.3% or 6,200 metric tons from the prior year's quarter to 266,700 tons, largely reflecting the impact of the plant consolidation in Korea. On a like-for-like basis, that is excluding the impact of the Korean plant closure. Volumes increased by 1.3%.

Revenues increased by 17.6% to $394 million in the quarter, primarily due to the pass-through of higher feedstock costs as well as base price increases and favorable product mix, offset somewhat by foreign exchange translation effects and then -- and to a lesser extent, lower volumes resulting from the Korean plant consolidation.

Our overall contribution margin increased strongly by 8.4% in the third quarter to $143 million versus $131.9 million in the prior year's period.

Now turning to slide 14. As the waterfall chart on the upper left side of the slide shows, this increase in contribution margin is mainly driven by improved base pricing and mix, the efficient pass-through of higher feedstock costs and increased cogeneration income, partially offset by negative foreign exchange translation impacts.

The second waterfall chart on the upper right-hand side shows the development of adjusted EBITDA. It also shows that the contribution margin increase was clearly the main driver of the improvement in the quarter, only partially offset by the timing of fixed costs spent. Adjusted EBITDA increased as a result by 13.2% or $72.6 million. Our adjusted EBITDA margin of 18.4% slightly decreased by 70 basis points versus last year's quarter, reflecting, in large part, the impact on revenues of the pass-through of higher feedstock costs.

The waterfall chart along the bottom side of the slide analyzes net income development, which showed an increase to $24.2 million versus $15.1 million in the prior year's quarter as a result, mainly, of the increase in adjusted EBITDA as well as decreased finance costs, offset by higher taxes associated with increased profits.

It is important, however, to note that we now expect our effective tax rate in 2018 to be around 31%, confirming a further favorable decline in this key metric.

Now turning to Slide 15, showing our cash flow dynamics and our key balance sheet metrics as of September 30, 2018. For the first 9 months of 2018, we generated a strong $76.9 million in cash from operations, despite the cash consumption impact of $99.9 million associated with higher net working capital, in large part as a result of higher raw material costs. This cash generation, together with gross proceeds of $64.7 million from the sale of our former plant site in Korea, 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 September 2018 was $55.2 million.

The company's non-current indebtedness as of the third quarter-end was $658.7 million, with net debt of $609.3 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.

Turning to Slide 16. We are reaffirming our 2018 adjusted EBITDA guidance of $285 million to $300 million, with a weighting above the midpoint of the guidance range. Although a rise in energy costs, adverse foreign exchange effects and headwinds associated with trade tariffs and other political uncertainties could lead to a slightly more challenging environment for the balance of the year, we believe that we are well positioned given the strength of our rubber segment and the continued success of our premium specialty black segment.

In terms of other guidance, we expect base capital expenditures for 2018 to be approximately $90 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 $95 million, with, as mentioned, our tax rate expectation for 2018 on pretax income at around 31%.

We're on track to convert our financial statements from IFRS to U.S. GAAP to take place by the end of 2018 without any significant impact on the previously reported operational performance for 2018 or to any prior year. Furthermore, we plan to convert to domestic filer status with the SEC, effective in 2019. While these accomplishments are important milestones to be eligible for inclusion in key U.S. stock indices, achieving a U.S.-based group TopCo represents completion of the last step necessary for index inclusion. In this regard, I can now confirm that we have identified what we consider to be a tax-efficient route for us to establish our U.S. group TopCo based on current tax legislation.

While we now could accomplish this move during the first half of 2019, we believe it is more tax efficient to delay this until the beginning of 2020 to take advantage of further identified steps such as consuming the legacy tax loss carryforwards that will significantly minimize our cash taxes. This approach will continue to support the trend established in the last several quarters of lowering the group's effective tax rate, which has already been reduced from around 35% in 2017 to the expected 31% for 2018. This will, however, not prevent us from attempting to convince Russell and S&P to include Orion in their relevant indices before 2020 given the steps we've already undertaken to meet the relevant criteria, including now having established a route to a U.S.-based TopCo.

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

Thank you, Charles. Orion delivered solid results for the first 9 months of 2018, and we look to finish the year strong as we reaffirm our guidance. Beyond that, we believe 2019 will be an even better year.

Please turn to Slide 17. We have executed on our margin recapture plan and continue to do so as we speak. We are enjoying robust rubber carbon black demand against the history of modest carbon black investment in new capacity. This is driving improved rubber pricing for 2019. At the same time, we are expanding specialty capacity in Europe and have just acquired a 7 new carbon black capacity, adding another important technology to array of carbon black production methods, which is already the broadest in the market.

IMO 2020 will shake things up a bit, and we're positioned to protect the downside while working to create some upsides. Finally, we remain committed to shareholder-friendly capital allocation. Again, I'm extremely excited to join Orion and look forward to working with a strong team and established company. Orion's strategy remains on course while we also tap into additional ways to drive future profitable growth by looking at new applications for carbon black, exploring underexposed geographies and improving operations to drive efficiencies at the plant level.

Now we will be delighted to take your questions.

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

I guess, to start, there's been a fair amount of concern in the market recently about Chinese autos, weaker tire market. I was hoping you could maybe triangulate the difference between the continued positive demand you are seeing versus maybe some of the data points we've seen lately in the tire market.

Yes. So I think one reality is, in the tire market in China, we're just not a huge player. We are much more of a specialty and, let's say, a high-end rubber black player in that space. So when we talk about our vision to our customers in China, which I'm happy to go into, it's much less slated towards a tire slate there than perhaps it is for other people. So I look at some of the same comments you've seen in other companies, tire companies that have come up, and I don't think we are in a position to dramatically disagree with them. It's just to recognize we're a small player there and, therefore, we're able to position our products nearly in the premium specialty markets.

Got it. That's helpful. And then on rubber pricing, I assume you can't get into too much detail, but is it fair for us to assume that base price increases next year are higher than the level of base price increases this year?

So for me, it's a little bit of a test on what have they achieved last year. I would just say their robust increases than we have, and I think we'll describe more about that when we come up to the end of the year and we make our forecast for 2019.

The next question is -- come from the line of Kevin Hocevar with Northcoast Research.

Just wanted to dig into China a little bit more. Just kind of curious, on the specialty side, it seemed like there's a little bit of volume weakness, and you called out China, you called out destocking. Wondering if you could give us some indication of how that quarter progressed for Specialty and what you're seeing here and kind of your expectations going forward for volumes there on the specialty side. And then on the rubber side, just kind of curious, the environment overall in China, are you noticing curtailments starting to occur? Like -- because I know there've been changes in how they're doing. I think last year was kind of a broad blanket sweeping cuts, and this year it's a little more targeted. That's our understanding. So are you starting to see those curtailments occur? How's the demand environment on the rubber side there? And how's the pricing holding up there?

Right. So to just speak about China generally. So first of all, through the curtailments, I think it's early in the season for that. The heating season really isn't full on. So I think that's yet to be seen how that actually plays out on the ground. I was in China a couple of weeks ago and talked to people from a number of industries, and I would say that sentiment in the manufacturing world in China right now is sort of wait-and-see. I don't think people are really terrified of a trade war because, as you k tariffs and FX can sort of offset each other and the 2 countries have a history of working things out. But I would say, people are just sort of cautious. And it's hard to know for certainty when we see an impact on volume, how much of that is destocking, how much of that is, well, them destocking sort of their downstream supply chain and [lowering] to run that leaner and, therefore, cutting back production, how much is end-market demand. That's hard to see. I would say, certain factors that were bound in, let's say, August were not as impacted in subsequent months. And so it's been a little bit spotty in there, and I think we just need a little bit of time to see how this thing plays out for us. In general, though, if we're going to compare this to a year ago, just so we're clear on this, volumes are going to be up substantially from a year ago. There's no question about that.

Okay, great. And then in the third -- in the rubber segment, in particular, your EBITDA increased sequentially from 2Q through 3Q. And I think normal seasonality has that declining slightly because you're a large player in Europe and just a normal summer downtime there, but you're able to improve that. So wondering if you can give us some color there. Because I think FX turned against you sequentially, but at the same time, you've implemented some spot pricing actions. You had a couple of price increase announcements throughout the world, so wondering if that's what provided the lift. Or maybe you can help me understand how you got the sequential lift in EBITDA there?

I'll take that one up. Kevin, it's Charles. It's really a -- more of a mixed story than anything else, Kevin. We had a very good mix in the third quarter, which really drove the -- drove part of that increase. The other factor was, for a variety of reasons, including energy sales and also the way some of our formulae work, we benefited from a pickup in the oil prices. We talked over many quarters about the fact that the rubber business does quite well typically as -- within reason as oil prices rise. So those were the factors.

Okay. Great. And just last one for me on the SN2A acquisition. It sounds like it cost $30 million. Can you give us any other idea for the sense of sales and EBITDA contribution and how fast the business is growing, just some other metrics around the business?

Yes, I think the key thing that they understand about this interest -- this business is that for LyondellBasell, the key priority was getting rid of a settling, right. They had a byproduct. When we have bought this, we have to commit to continue to take that, which, of course, we're happy to do. Sales were modest, let's say, under $10 million, EBITDA was modest. And so the way to think of this is not so much, boy, you've bought it for that existing business. You bought it because you've got a plan, and we believe we have the opportunity and the capability to bring this into just simply different market segments and most excitingly for us to get actually into lithium-ion battery.

Your next question is from the line of Mike Sison with KeyBanc.

In terms of rubber carbon black pricing, I think you noted in your opening comments that pricing is still pretty far away from the capacity expansion economics. So I'm just curious how far away are we from today? Is it 20%, 30%, 40%, 50%? And how soon do you think the industry can get there to support new capacity?

Great. Let me -- that's an excellent question. Let me speak to that. So maybe just a little anecdote. I was with a customer a couple of weeks ago, and they were complaining to me basically about the increased prices for 2019. And one of their comments was, we're paying all this more money, and we're not going to get investment, we're not going to get new capacity. And in the nicest possible way, I tried to explain, you're right, you're not, and we're below that point. And that's -- that is the fundamental thing here. And people have added rubber demand, especially for things like off-road products, which use a lot of carbon black. So that's kind of the rub, and I think how soon is it going to be? It's going to turn on really how the next cycle of pricing goes. My belief is we're probably in the neighborhood of 2 pricing cycles away from the point when it's going to get to reinvestment in North America certainly. But if next year moves in a really big number, well, that could change, and that's going to depend on the market dynamics.

And then you talked about contract pricing being accelerated this year and given your background on your products, you guys are really pros at contract pricing. So do you see any opportunity to change the way the rubber carbon black industry does their contracts? Are there opportunities to have longer-term contracts? Just sort of your thoughts there in terms of the way the industry has contracts to the tire companies.

So I have brought up that topic, as you could imagine, with several of our larger, I would say, companies who are more strategic thinking, right, because for them, swings like what's happening going into 2019 is challenging for their planning purpose and yet as the point is, yes, it's still below the reinvestment point. So there's a little bit of a discomfort in the current model, which I think creates a window to potentially think about changing what the business model here is. So I'd say, that's possible. It's absolutely something I've explored with customers. I respect Jack Clem tremendously. He's been a tremendous help to me in this transition. And Jack just points out that this is the current approach to sort of deep history in this industry. So we'll have to see how that goes. But absolutely, I think it would be good for all the players if we move to a more stable contracting system here.

Great. And then one final question on the Specialty Carbon Black business. Organic growth there has been very good for the last several years, but I'm just curious of your thoughts on where EBITDA margins should be or what level it should be. It's come down quite a bit from the mid-30s in '16 and you're hovering in mid-20s now. Any thoughts on where that business should be in terms of profitability?

Well -- so -- and the whole issue of margin, is that the right way to think of it? I think we would argue, no, because we've got this energy pass-through issue. So I think we would put it more on dollars per ton in terms of the profit margin on that, and we've given a range before, I think, of $750 to $800. Let me just say though that, that's like an average over a lot of different products, and the nature of the specialty chemical business is this particular grade, mix, whatever is very effective in one particular application. You're kind of have to be the best in that application, and this other application is this one. So depending upon how much value you're creating for the customer, you can drive the price point in your profit from it quite substantially different from that average. So I just want to make it clear, it's not like we're pricing and saying, oh, this is the kind of margin we want. We price to the value we create and the market forces that are out there, and that tends to average out in that kind of range historically. And I don't see any reason to change that.

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

At Air Products, one of the big changes was going from global gas structure to regional structures. And at Orion, you have global segments for rubber and global segment for specialty. And the specialty black business seems global for me, but the rubber black business seems much more regional like gases. Is the Orion rubber black structure already regional enough in your opinion? Or does it need to be more regionalized like you did at Air Products? Or is that a bad comparison because of the global tire companies?

Well, I'd tell you, even in this -- I think in any distributed company and both these companies are similar in that you have a number of production sites all over the world, there's always an element of being local to that. You can't function without that. So obviously, there's some local structures in place here. I think it's worth thinking through what the structure of Orion is and how we go to market with that, but I would just say, I've been here 60 days. I'm in the process of learning the systems and so forth. So I would just acknowledge your point that there is an element of global and local dynamic, and you need to be able to do both of those well to succeed in this place or in this marketplace. And where exactly we make tweaks going forward, just give me a little more time on that.

Okay, that's fair. And then is it fair to think about parallel between carbon black and the gasification of resid and partial oxidation businesses for the industrial gas companies? And I think one of the main differences there, actually, is that I think carbon black is a much lower efficiency process. I don't know if that's fair, but I thought maybe plant efficiency might be a major target for you.

Well, so clearly, I come from a very strong operational background. So I would say plant efficiency is like a steam methane reformer or a proxy unit or whatever. There's a lot of waste energy and so how you either sell that waste energy or convert it into high-quality electricity, that's an opportunity for us here. The yield, so carbon-in and carbon-out are opportunities for us. Uptime of the facilities, quality mix because we're a specialty player, all those things, debottlenecking, they're all in there. What's interesting about Orion is this company is, to some degree, a collection of companies that got acquired and sort of rolled up over time. So our set of plants, there's a fair amount of diversity amongst them and diversity in what the actual production lines are in each plant, and so that gives us some challenges and some advantages. And I think one of the issues here is that each one of those things I just rattled off might be most appropriate for a particular line in a particular plant, but a different opportunity, maybe even the same plant on a different line.

The next question is from the line of Chris Kapsch with Loop Capital.

Corning, belated congrats to you on your new role. So you mentioned strategically a couple of opportunities that you see albeit 60 days in here. On expanding the applications reach, and presumably, you're talking more on the specialty side of the business, I'm just wondering, if you look at the organization, do you feel like you have the right skill sets and commercial reach and applications development, personnel in order to go after some of these opportunities that you might be seeing? Or will there be a meaningful retooling of the organization, the addition of additional resources to go after some of these opportunities that you referenced?

Right. Excellent question. So first of all, I would say, the SN2A acquisition is an example of retooling. And with that, we got the manufacturing facility, but also some people who market that today for them. In general, to enter a new market, you're looking to bring in some people, not many, who perhaps come from that industry and know it very well. And it's easy to sort of get that person up to speed on carbon black or in my past life industrial gases. And then that person is able to go out into the industry, the customers' industry, with a high degree of credibility and talk it through. So yes, if you're looking at a new market that you wanted to enter to bring in a couple of people like that would be appropriate and like a pretty well-worn path on how to do it. But I would just say, of the current people here in our technical support, sales applications, that sort of thing, I meet with them, they have -- they're -- many of them are from the industry they serve, and they've got a very good understanding of it.

Okay, that's helpful. And then you -- in terms of more on the process side and opportunity there in terms of efficiencies, it sounds like you rattled off a number of things, yields, cogen, plant uptime. Is it safe to conclude that the increased -- the incremental increase in CapEx that you referenced is targeted at these yield opportunities? And is there any way to sort of frame up what the opportunity is quantitatively and over what time frame? Or is it just too early to really talk about that?

Yes. I'd say there's one other element, though, of maintenance capital, and that's simply uptime. And our loading on our facilities of the lines that we're running in many parts of the world is over 90%. So there's also a value in just making sure you can keep the plant up for that percentage of the time, and so we're not impacting the customers. And we're squeezing and sweating assets just absolutely as hard as we can. I don't think we're in a position to kind of outline what we think this is going to get us this in that kind of time frame, and I think it's just a mix of both investing to keep the wheels on the bus so that we make all those sales and we can maintain these high levels of loading as well as creating some efficiency gains.

Chris, I mean, we talked in the past, and it still applies, regarding yield improvement, the 1% improvement in yield. Literally, the amount of carbon we get out of our feedstocks depending on feedstock price is roundabout $7 million to $8 million per year of increased EBITDA. So it's meaningful, and you've got to get it. And that rule of thumb still applies in the context of everything else calling itself.

Got it. That's helpful. And then just 1 follow-up on the characterization at this point on the contract negotiations in the rubber business. You mentioned the pricing. You mentioned also that you foresee 2019 being sold out. Does that imply sort of static market shares based on the outcome of the negotiations at least thus far? Or was there any notable share shifts one way or another?

I think it's -- I think the priority of the tire manufacturers and the big MRG companies right now is just securing their supply for next year. And I think that's why the contracts move down early. And I think in that kind of environment, it means it's relatively stagnant. I've just been to one of our field locations recently, and we had sort of priced our way out of 1 company and then were able to sign up another at the kind of price points we were looking at. So I'm not saying there's no swapping. But I think, in general, there's not huge shifts going on right now. I don't think that's the priority of the customer.

Our next question is from the line of Laurence Alexander with Jefferies.

This is Nick Cecero on for Laurence. So you've talked a little bit before about destocking in China. I was just wondering, are there any other areas where we might see some destocking?

So even if conceivable, we have that -- some of that playing out in other parts of the world, I wouldn't say no, not at all. But I think that's where we have the most potential exposure to it in terms of channel to market and where there's probably the most uncertainty in the end market. I'd say the automotive market in Europe right some of the environmental regs is a little bit uncertain. But I wouldn't put that as a destocking issue.

Okay, great. And then you also had mentioned before about the expanding into new markets, and I was wondering if you can provide some more color into maybe what market you would like to be in that you currently aren't in or maybe some current markets that you'd actually like to expand.

Right. So I think on the markets, there's a couple of things out there. So first of all, we would just simply like to do better in the United States where we already are in our Specialty business. That's an opportunity for us. We would like to keep up with the growth that we can enjoy in China. That's an opportunity for us. We would like to get into batteries in a more meaningful way. SN2A is an example of that. And so that's maybe a geographic build-out, a geographic can I go deeper, let's say, China and an example of a different application. And they're all real, they're all happening.

(Operator Instructions) Ladies and gentlemen, we've reached the end of the question-and-answer session. And I will now turn the call back to Corning Painter for closing remarks.

So I'd like to thank you again for joining us today. We really appreciate your valuable time. As you can sense, we're excited about the opportunities and the long runway we see with our existing strategy here at Orion, and we pledge that we're going to be good stewards of our investors' money as we move down that runway. And just finally, I'd say I'm very pleased to be part of the story. Thank you for joining us and have a good day.

Thank you.

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