Orion Engineered Carbons SA Aktie

Greetings, and welcome to the Orion S.A. First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris Kapsch, Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, Michelle. Good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion, and welcome to our conference call to discuss first quarter 2026 results. Joining our call are Corning Painter, Orion's Chief Executive Officer; and Jon Puckett, our Chief Financial Officer. We issued our first quarter results yesterday after the markets closed. And we have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call.

Before we begin, we are obligated to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties described in the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, May 7, 2026. Orion is not obligated to update any forward-looking statements based on new circumstances or revised expectations.

All non-GAAP financial measures discussed during the call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the quarterly earnings deck. Any non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP. With that, I will turn the call over to Corning.

Good morning, and thank you all for joining us. I'll start with a few high-level comments on our first quarter results. Then I want to touch on some of the bigger picture themes because they are directly related to how we're managing the company in these dynamic times. Then I will hand the call over to Jon to discuss Q1 results in more detail before some concluding remarks and Q&A. Starting on Slide 3. We feel good about our first quarter results. Adjusted EBITDA of $46 million was ahead of our internal expectations despite a relatively slow start to the quarter.

Building from that start, we experienced a favorable progression with demand improving meaningfully during the month of March. The demand pickup was most pronounced in our Specialty segment with broad-based improvement across most end markets we serve. Notably, demand strength has persisted through April and into May. This gives us confidence to increase our full year adjusted EBITDA guidance range, which we'll address in a moment in more detail. Naturally, stronger demand may reflect a response to the move in oil prices and uncertainty about future costs. But we also believe the demand uptick reflects a shift in customer preference towards prudent, more dependable and more local regional suppliers because of the concern about extended supply chain. I think it goes without saying just how fluid the landscape has become.

Energy prices are one factor, but our broader supply chain uncertainties related to the availability of crude oil and its derivatives being disrupted by the Middle East conflict are also in play. We see these dynamics as creating opportunity for Orion to showcase the inherent resilience of our business and the agility of our entire organization. Most pointedly, we believe we are poised to benefit from our footprint, which is under-indexed to Southeast Asia relative to the global carbon black industry. Our large global customers that have substantial production in Western Hemisphere should also be positioned to benefit from the current situation in the Middle East, as Middle East and Asia-based production is likely to be the most impacted.

Given the almost daily volatility, I wanted to share how proud I am of the Orion team. Our actions include balancing demand responsiveness with continued judicious inventory management. We have adroitly and proactively been executing pricing actions and purchasing decisions intended to protect margin as well. I have provided the broader context of how to think about this conflict from Orion's perspective on Slide 4. As you know, 2026 is playing out against a rapidly evolving backdrop. To be certain, periods of geopolitical turbulence can reshape supply chains in precipitous and lasting ways, setting up a new normal. If there is just one takeaway from this slide, it would be how the current backdrop is reinforcing the value of reliable, local manufacturing and logistics.

In concrete terms, that means having the product in region with more stable raw material and logistic costs. It plays to Orion's supply and manufacturing footprint. A couple of other considerations on this slide. We don't mind high oil prices. We've disclosed sensitivities consistently over the years, showing Orion's beneficial P&L leverage to higher oil prices. This is a function of the investments that we have made in productivity and process yields, which are more valuable at higher feedstock prices.

We mentioned how the global supply chain and energy price volatility has boosted demand for our products. Note also, the vast majority of our business is protected by contractual pass-through mechanisms, and these are performing as expected. Our customers generally absorb underlying feedstock cost volatility, where energy prices are not passed along through [indiscernible]. For example, in the spot market in China or a bit more than half of our specialty portfolio, we have been actively and successfully implementing price increases and surcharges to offset the higher feedstock costs and protect margin.

For the most part, our feedstock availability has not been impacted by the Middle East, largely because we buy in region or regional production. As disclosed in our sensitivities, we do bear some working capital burden when oil prices move higher. Jon will elaborate more in a moment. But in short, the working capital headwind based on recent oil prices is manageable. On Slide 5, we highlight actions we are taking, flexing our agility to support our customers, protect our business and create margin opportunity. We have been nimble and responsive to the strengthening in demand. Although not the largest, we do have the industry's most diverse portfolio of reactor process technologies.

Against this backdrop, we are able to leverage our plant network to shuffle some production and fulfillment capabilities across our footprint to respond to higher demand trends and capture incremental opportunities at a premium. Given the macro uncertain, we remain intently focused on company-wide cost reductions. On top of the headcount reductions we already have implemented, we are uncovering additional efficiencies through operational excellence initiatives as well as incremental procurement savings. We remain on track to achieve the previously conveyed $20 million in gross savings as well as our $90 million full year CapEx expectation, which is about $70 million lower than 2025.

We mentioned optimizing working capital during our February call. We now have good visibility on specific pathways focused on inventories, supplier payment terms and receivables that should collectively unlock at least $30 million of cash from working capital over the course of 2026. We are pressing to find additional levers. On Slide 6, we view recent tire industry trade flow data as highly encouraging. Notably, the most recent favorable data was before the Middle East conflict even started impacting global supply chains.

Many believe that chemical and rubber manufacturing in Asia will be significantly more impacted than in the U.S. and Europe, strengthening demand in these regions. There are a handful of Southeast Asian countries exporting tires to the U.S., but Thailand is by far the largest. As shown in the chart on the left, February monthly tire exports from Thailand to the U.S. were at their lowest level in more than 2 years, down 19% from last February and down 28% from last year's peak in May during the 2025 surge to beat newly implemented Section 232 tariffs.

Conflict-induced tightness in key synthetic rubber inputs like butadiene and sharply higher other raw material and shipping costs may well -- very well put further pressure on tire exports to the U.S. Exports appear in the import data on a 1- to 2-month lag basis. But as you can see, in the U.S. tire import graph on the right, pre conflict, February monthly tire import levels declined 9% year-over-year, already the lowest level in 3 years. It's worth mentioning several other potential catalysts or indicators for the second half of 2026 and the setup into 2027.

First and most importantly, last week, the European Commission distributed a document outlining as expected definitive findings from its investigation into the dumping of Chinese passenger car and light truck tires into the EU. China is by far the largest export of tires into Europe, comprising nearly 80% of the EU's Asian tire imports last year. The proposed duties basically range from 30% to 52% effective June 18. Separately, the anti-subsidy investigation there continues.

Second, the USMCA trade agreement is scheduled for resetting on July 1. And third, leading auto industrial macro indicators have turned positive with Eurozone and North American PMI readings both exceeding 50 for the last 3 to 4 months. These foreshadow demand improvement in our Specialty segment and possibly an upward inflection in the freight industry cyclical trough as well. Fourth, most recent freight tonnage indexes have depicted acute strengthening. For example, the March ATA Index, a measure of freight tonnage in the U.S. posted its highest level since 2017. Our recovery in the freight market would bode very well for replacement truck tire demand as we discussed last quarter. With that, I'll hand the call over to Jon.

Thank you, Corning. Slide 7 covers our Q1 results at a high level. Overall, adjusted EBITDA of $46 million was ahead of our internal expectations, thanks to better demand late in the quarter, which drove 2% higher year-over-year volumes. However, adjusted EBITDA was down year-over-year with essentially the entire bridge attributable to the outcome of our 2026 calendar pricing agreements within our Rubber business. Our Specialty segment was a bright spot in Q1 with adjusted EBITDA improving 7% year-over-year to $27 million. Broad-based demand strength late in the quarter helped drive 3% higher specialty volumes. Favorable mix contributed to the earnings growth, more than offsetting a fixed cost absorption headwind from an inventory draw, in part reflecting the higher demand.

Our Rubber segment earnings declined sharply despite higher volumes, but results were generally in line with expectations. In addition to the lower annual contract pricing, the pass-through effects of lower year-over-year oil prices and adverse regional mix were also factors. During the quarter, we had a free cash outflow of $48 million, including a working capital use of $54 million, a function of normal seasonality and the incremental impact from higher oil price volatility in March. Capital expenditures of $36 million were in line with expectations, reflecting some residual spending on growth projects that will taper off over the balance of the year.

Slide 8 highlights our Specialty segment's results in Q1, including 7% year-over-year adjusted EBITDA growth on 3% better volumes. In addition to favorable mix, foreign currency was a positive contributor to our earnings bridge, helping more than offset an absorption headwind from an inventory draw. Considering that industrial markets overall remain generally soft, we were pleased with the Specialty segment's gross profit per ton of $675, which was roughly flat on a sequential basis. Looking forward and based on current order books and customer discussions, we expect late Q1 demand strength will persist through our second quarter.

Recovery in demand in China should continue for Orion, where we're making progress in our manufacturing technology improvement at Huaibei and ramping profit contribution at the site. In the past few months, we have made excellent progress resolving technical challenges at this facility. More than half of our Specialty business operates without contract cost pass-through terms. So this is where a disproportionate amount of our commercial team's energy is focused, executing price increases and surcharges to mitigate higher feedstock, energy or logistics costs and protect margins.

We are highly encouraged about the demand strength and near-term outlook in specialties, but I will say our visibility beyond the second quarter is limited. The course and impact of the Middle East conflict is simply not known at this point. We are proactively monitoring order trends in our response to ensure the demand strength is genuine and not situational demand, driven by price increases across the entire chemical chain. Our implied forecast for the second half reflects today's uncertain geopolitical situation.

Slide 9 summarizes our Q1 Rubber segment results, including the 53% year-over-year decline to $19 million of adjusted EBITDA. Let me reiterate the factors contributing to the bridge, including the annual pricing outcome from our 2026 supply agreements, adverse regional mix and the pass-through effects associated with lower year-over-year oil prices in Q1 that were down about $10 a barrel. The segment's overall volume improved, including strong year-over-year gains in Asia and modest growth in EMEA, more than offsetting lower volumes in the Americas that was impacted by low tire channel sell-through due to severe weather early in the quarter.

On the right side of the slide, we have some forward-looking commentary. Based on current order books, we see the demand improvement witnessed late in the first quarter continuing through the second quarter. Our contractual pass-through provisions will continue to protect Orion from oil price volatility even as we continue to proactively optimize feedstock purchases. We expect the Middle East conflict disruption will drive purchasing preferences to local regional supply chain, which is consistent with our footprint and should benefit Orion, but we have limited visibility into the second half of 2026.

On Slide 10, you will see that normal seasonality and oil price volatility late in the quarter resulted in a net working capital use of $54 million, leading to an operating cash use of $12 million. After CapEx of $36 million in Q1, our free cash outflow was $48 million. Net debt ended the quarter at $965 million, resulting in net leverage and a net leverage ratio of 4.2x. This ratio is comfortably below what is required in our credit agreement. We ended the quarter with nearly $200 million in liquidity. With that, I will hand the call back to Corning.

Thanks, Jon. On Slide 7, we share updated guidance. We're raising our full year guidance by $10 million to a range of $170 million to $210 million. We now expect our earnings split between the first and second half of 2026 will be roughly 50-50 because of the timing of annual European emission credits issuance has shifted from Q2 to Q3. Our implied second half guidance anticipates modest weakening of market conditions and typical seasonality.

Sustained strength in the current order books would take us to the upper end of this guidance range. Should the macro lead to a pronounced second half weakening in our markets, we could reach the lower end of our guidance. With the surge in volatility in oil prices and related working capital headwind, we now expect a full year free cash outflow between $25 million and $50 million, which is based on the assumption that oil prices remain elevated through Q2 before moderating to the mid-80s per barrel in the second half of 2026.

Second quarter cash flow will be consistent with first quarter and should improve in the third quarter and turn positive in the fourth quarter. This cash flow range and cadence is consistent with our rule of thumb sensitivities on oil prices, which have held true even in the current global uncertainty.

On Slide 12, some concluding remarks before we open the call to Q&A. Again, I'm proud of Orion's agility against a tumultuous backdrop. The team is energized and working diligently to respond to higher customer demand, manage input cost volatility, execute on price increases and surcharges to protect margin dollars and to mitigate business risk. While testing our organization, we also believe the challenging environment is providing an opportunity for Orion to showcase our inherent resilience. Beyond feeling good about Q1 results and raising our full year guidance despite the turmoil, looking further out, we're increasingly optimistic about how the current trends set up for an earnings recovery in 2027. With that, Michelle, let's open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Laurence Alexander with Jefferies.

This is Kevin on for Laurence. So you saw that meaningful pickup in orders in March that lasted through May. And I guess to what extent do you think that, that recent order strength is being driven by customers that are securing supply versus like underlying -- true underlying demand growth? I just want to know how sustainable you think this dynamic could be when and if supply chains eventually normalize?

Sure. So let's divide that into 2 markets. On the rubber side of the house, there really isn't much in the way of inventory building, that kind of thing, especially on carbon black, just given the nature of the product and the quantities that are consumed in it. So we think that reflects tire manufacturers making more tires in our key markets right now. If we move into the specialty area, okay, there is a supply chain before us -- between us and the end consumer for, let's say, the consumer-based portion of that. Again, our read, and we've been really cautious about this. This is prebuying, trying to get ahead of a price increase, something like that. But our read is our direct customers have orders for that product. And then, of course, some of that specialty product goes more into the infrastructure side, that kind of area, and that's going to be less impacted by those dynamics.

Got it. Okay. And then just a second question. So like with the rubber EBITDA down, I guess, curious to know whether you think that Q1 could be the trough? And I guess, how do you expect pricing and versus cost to trend through the remainder of the year?

Sure. So in rubber, for the most part, the pricing is set in an annual negotiation process. So we're in for this year's profitability in pricing. We were struck last year by like a perfect storm of many different factors, which I think really weakened the pricing environment. As we look forward for 2027, I would say we see a strengthening in that environment compared -- certainly compared to where we were last year in terms of fewer imports in terms of supply-demand balance. And in talking to large customers recently, Tier 1 customers, a renewed commitment of these guys to hold on to their market and rebuild from where they are.

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

Nice guidance. Are you seeing a lot of differentiation between the specialties end markets between plastic masterbatch versus coatings versus inks? Those customers have a lot of their other ingredients going up a lot because of the Persian Gulf conflict. So I don't know if they have differentiated behaviors?

Yes, John, great question. But right now, I'd say it was really quite across the board, geography-wise, end market-wise, we just saw a stronger level of activity. And maybe if you think about the PMI activity, that makes sense as well as, again, direct customers feeling they've got orders for it. If you look at the margins, it was obviously also a good quarter for us in terms of the premium grades taking part in that rally.

Okay. And second question, I know it's not a big market, but it's -- I think it's your largest Asian market is South Korea. It's one of the countries that stressed the most from the Persian Gulf conflict. So I'd appreciate your thoughts on what you think happens in South Korea here as we go through the next couple of months.

Yes. I think South Korea is just indicative of, let's say, a lot of Asia ex China, let's say, in that people who are reliant on petroleum and petroleum derivatives from the Middle East are in just a much more difficult situation. Even if this thing opens up tomorrow, I think it's very clear, it's going to take quite a while to get back on its feet. So that's a negative, obviously, for business activity in those areas, including Korea for us. But I think it's a real positive for manufacturing in the U.S. and yes, manufacturing in Europe as well.

Our final question comes from the line of Josh Spector with UBS.

I was wondering if you could unpack the rubber bridge a little bit more. I mean being down $20 million was kind of more than we thought it would. We thought the pricing reset was maybe a $15 million headwind year-on-year. And you had a pretty easy comp from a mechanical outage a year ago that we thought would help by about $10 million, but we didn't really see that. So what were some of the other factors that maybe drove that around? And is that price impact on an annual basis much larger than what I'm sizing?

Sure. No, the price impact was larger than what you expected. And if you look at our volume, that was even having lost some volume in some of the key, let's say, like Americas markets. So I would look at that. That was a little bit offset by the higher oil pricing that we had in it, but pretty much the whole story there is pricing. And again, I look to '27 and we look at what's happening in tire imports and the data on those graphs, the tumult in the marketplace, the resolve to hold on to their share, the ramping of some of the new investments in North America, I think it's a better setup, but last year was really tough.

Did you get any cost help from the lapping of the manufacturing outages a year ago? So I guess I'm trying to figure is pricing down $20 million a quarter or $30 million a quarter?

I would say it's not down quite that amount in either one, if you think about the net for the whole year. But yes, certainly, we had better manufacturing than we did last year, but we also had lower volumes in some of our markets. So in those markets, there's a fixed cost component as well. Does that answer your question, Josh? I'm not sure.

Yes. I mean that's helpful. And we can follow up if need be. And if I could just ask one other one, I guess, on the specialty side. I mean you made the comment like you have a lot of pricing and surcharges. You feel pretty good about that. Do you think that generally matches your cost movements as you look at 2Q? Or would you expect a headwind in specialty margins that then recover in 3Q?

No, no. I think we had to raise prices again in May to -- because we saw, for example, natural gas in Europe move. We're very intent on trying to keep those -- keep that even for us.

All right. Thank you all. I appreciate everyone's time today and your actually excellent questions given the situation that it is. I just want to once again thank everyone and our investors' interest in it and to say, look, we are determined to make the most of the current market from all. It actually creates opportunities for Orion in terms of a reset of how supply chain work and something that can go in our benefit, and we are all over that. Beyond that, I look forward to a continuing dialogue with many of you over the next coming weeks and months. Thank you, and have a good rest of your day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Greetings. Welcome to the Orion S.A. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I'll now hand the conference over to Chris Kapsch, Vice President of Investor Relations. Thank you. You may now begin.

Thank you, Rob. Good morning, everyone. This is Christopher Kapsch, VP of Investor Relations at Orion. And welcome to our conference call to discuss our fourth quarter and full year 2021 earnings results. Joining our call are Corning Painter, Orion's Chief Executive Officer; and John Puckett, our Chief Financial Officer. We issued our fourth quarter results this morning, and we have posted a slide presentation to the Investor Relations portion of our website. we will be referencing this deck during the call. Before we begin, we are updated to remind you that some of the comments made on today's call are forward-looking statements.

These statements are subject to the risks and uncertainties and as described in the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, February 17, 2026, and Orion is not obligated to update any forward-looking statements based on new circumstances or revised expectations.

All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the quarterly earnings deck. Any non-GAAP financial measures should not be considered as alternative to financial measures by GAAP.

With that, I will turn the call over to Corning.

Good morning. Thank you, Chris, and thank you all for taking the time to join our conference call. Before getting into our Q4 review commentary, I'm excited to introduce our new Chief Financial Officer, Jon Puckett, who joined Orion in early December. John has over 30 years of financial leadership experience, including 14 years in the chemical industry. Some of you may know him from his tenure at Celanese, where he most recently served as Vice President and CFO of the acetyl segment. John, it's been a few months, but welcome again to Orion.

Moving to our results discussion starting on Slide 3. We finished 2025 with better Q4 results than we had contemplated early in November. The upside was primarily a function of higher volumes than customers had forecasted. In rubber, tire factory curtailments were not as pronounced as customers had indicated. A larger factor, however, was our Specialty segment where volume and mix were better than expected. I'm particularly pleased with our free cash flow of $55 million for the full year, thanks to a concerted effort from our team to drive working capital efficiencies. We will discuss in a moment why we expect positive free cash flow to continue in 2026 despite lower EBITDA loans.

One of Orion's core values is our emphasis on safety and 2025 was a near record year for employee safety within our company globally. With only 3 incidents across our network of plants, last year was the second best year since Orion became a public company. And based on industry standard metrics, our performance was about 9x better than the broader chemicals space. A huge congratulations to our team on this distinguished achievement.

Moving to Slide 4 and really for the next few slides, my intent here is to touch on 3 key points. First, what the industry has endured leading to the guidance we've conveyed today. Second, the actions we have taken to navigate these trough conditions, including what is needed to ensure we deliver positive free cash flow this year, next year and in the future. And third, tire industry data, which is indicating our businesses fundamental drivers are setting up for recovery.

On Slide 4, we recap a few dynamics that translated into a uniquely difficult backdrop for the carbon black industry in 2025, leading to a challenging negotiations for 2026 supply rate agreements. We've talked for some time about the elevated imports of tires into key Western regions. These generally persisted throughout the year and some auto industry experts have argued that tariff uncertainty only magnified this serves throughout much of 2025. I will share encouraging data in a moment that suggests an inflection could now be at hand.

Part of what fueled the import surge was a lingering consumer response to higher inflation, resulting in a trade down to lower value brands, which are mainly imported. We believe this trade down has occurred in the truck and bus category as well, especially with smaller fleet operators. Encouragingly, industry trade journals have reported this trend reversing. In the past couple of months, Tier 2 and Tier 1 tires outsold Tier 3 brands for the first time last year. This trade up reversion is a positive trend for our customers and more consistent with historical consumer preferences.

Shifting from passenger car to truck tires, freight activity has been a drag for the tire industry for the past few years. This may surprise some on the call, but it's an important point. Truck and bus tires come for about 1/3 of all carbon black that has consumed the entire production globally and more than 40% of the tire market in the Americas. Of course, this suggests that the freight industry's recession has also been a headwind to the truck tire demand and, therefore, carbon black.

The specialty portion of the carbon black industry has been affected by persistently weak PMI. In addition, broad uncertainty has discouraged investment, encourage lean inventories and weighed on consumer confidence. Collectively, these soft demand conditions have been a significant factor in the Carbon Black industry's challenging contract negotiations.

On Slide 5, we highlight the actions Orion has taken to ensure our resilience through today's conditions. We are relentlessly focused on managing costs. On top of the cost reductions last year, we're taking additional actions, which should drive $20 million in productivity, efficiency and headcount savings. We are sharply reducing CapEx, which is a key lever that will enable us to deliver positive free cash flow again this year.

We executed on the plan we announced last summer to rationalize 3 to 5 production lines and have already closed the lines we intend to. We are also pleased that our operational excellence initiatives are building momentum and bearing fruit. For example, the reliability of our North American plants improved more than 200 basis points over the course of 2025, enabling market improved on-time order metrics. We are focused on replicating our early successes here across our plant network worldwide. Efforts include adopting a variety of capital-light but novel process technologies, and at least one AI tool is being leveraged for greater process efficiency.

As you know, Orion believes we're entitled to earn a fair return when selling our products. In prior years, we have traded off some volume and and share to achieve this. However, in early negotiations last year, it became clear that this approach was not going to work for us, for our customers. We pivoted to a more win with our customer strategy to maintain share. At the same time, we found that our customers with weaker demand themselves were looking to consolidate suppliers. This approach favored global suppliers like Orion. We believe that we emerged from this process having defended our overall share and gotten closer to a few of our key customers.

Finally, we successfully negotiated and executed an amendment to our credit agreement that provides flexibility as we navigate through this cycle. John will elaborate more on this in a moment.

Moving to Slide 6. Underlying carbon black indicators are improving. Passenger car, truck and off-road tire categories each comprised out 1/3 of the Carbon Black consumed as a reinforcement material for the tire market on a global basis. The upper right chart with U.S. import data depicts the above normal level of imports starting in 2023 and persisting during 2024 before surging for how much of 2025.

The more recent trend suggesting import levels are subsiding is encouraged. In Europe, an investigation into the dumping of Chinese tires is now expected to include in June and the European Commission has simultaneously launched a probe into the subsidizing of Chinese made tires exported to Europe. A bit more of a leading indicator for imports is the export data from key tire manufacturing countries. Thailand is the single largest exporter of both passenger car and truck and bus tires to the U.S. And as depicted in the lower left chart, exports from Thailand have been trending favorably, generally declining since the initial framework for a country-specific trading deal with Thailand was announced on August 1. And subsequent to win Section 232 tariffs on truck parts, including tires, were effective as of November 1.

We're also monitoring potential positive outcomes from changes to the U.S. MCA trade agreement likely this summer. On this slide, we also show a sharp decline in tire exports from India, the largest exporter of off-road tires, including construction, mining and ag equipment tires.

On Slide 7, I merely wanted to remind investors just how pronounced the downturn in the key truck and bus category has been as gauged by freight activity. The cash freight shipment index shows 3 straight years of progressively lower freight activity in North America, including 2025 levels below the 2020 lows. There are indicators, including a rebound in spot freight rates suggesting this market could be at an inflection.

And with that, I'll turn the call over to John.

Thanks, Corning. On Slide 8, we highlight our 2025 results. We delivered full year EBITDA of $248 million, which exceeded our most recent outlook. The main driver for the overall performance was better-than-expected Q4 volumes, primarily in specialty and to a lesser extent and lower. Our Rubber segment generated full year adjusted EBITDA of $155 million, Rubber's full year results were impacted predominantly by lower tire production rates in key western markets due to elevated levels of lower-tier tire imports and soft freight industry conditions.

Volumes increased 4%, mainly on higher demand in South America and APAC, partially offset by lower demand in EMEA. Net sales decreased 3% on lower pricing. Adjusted EBITDA decreased 20%, primarily due to adverse customer and regional mix as well as the unfavorable effects from the pass-through of lower oil prices. Our Specialty segment delivered adjusted EBITDA of $94 million. Specialty's full year results reflect soft global industrial activity, particularly in transportation and polymer markets and macro uncertainty and lack of clarity around global trade policies. Volumes decreased 5%, owing to lower global demand.

Net sales decreased 4% on lower volumes and the pass-through pricing, partially offset by favorable foreign currency translation. Adjusted EBITDA of the Specialty Carbon Black segment decreased 14%, primarily due to the lower demand. Most notable achievement here is our free cash flow results for 2025. We generated $55 million of free cash flow on higher-than-expected EBITDA in the fourth quarter, working capital initiatives and a little help from lower oil prices. 2025 demonstrates our ability to generate positive free cash flow in a challenging environment, and we expect this to continue in 2026.

Let's move to Slide 9 for Rubber segment highlights and outlook. On a year-over-year basis, fourth quarter demand softness was due to higher-than-normal seasonality. The key driver was lower tire production rates in the West impacted by import levels as well as channel inventories that remain high due to the surge in imports throughout 2025. This headwind was only partially offset by higher volumes from additional lines.

In terms of outlook, we're assuming higher build rates in our key markets will remain subdued. Contract pricing for 2026 is set and baked into our outlook. Our strong and improved relationships with key tire makers position us well to take advantage of better industry and demand conditions, particularly in North America as they materialize.

Let's move to Slide 10 for specialty highlights and outlook. The segment's adjusted EBITDA of $27 million improved 6% year-over-year and 23% sequentially despite lower volumes. This was largely attributable to positive mix including the benefit from new production qualifications. In terms of outlook, we assumed flat to slightly lower volumes as PMI readings in key western markets and global auto build rates remain muted. It is important to note order trends are smaller and more frequent, often with just-in-time urgency. This tells us that inventory levels are quite like and should the macro backdrop improved, we could benefit from a restocking cycle.

Now on Slide 11 for cash flow and balance sheet metrics. Working capital initiatives were a key driver of positive free cash flow for the year, delivering $64 million during the fourth quarter alone. On a year-over-year basis, operating cash flow improved by $91 million to $216 million for 2025. We also spent $46 million less on CapEx in 2025 than in 2024. Our focused efforts drove $55 million of free cash flow, and I'm confident we will continue to pull all levers available to continue this trend in 2026. Strong cash flow performance in the quarter enabled $40 million in net debt reduction. We finished the year with $920 million of net debt and a leverage ratio of 3.7x, down from 3.8x at the end of the third quarter.

Finally, given the anticipated downdraft in our EBITDA in 2026, we proactively address potential issues related to leverage with an amendment to our credit agreement. Our banking group was very supportive with unanimous approval and our revised first lien leverage ratios ensure ample headroom even when considering scenario is more severe than those implied in our guidance.

With that, I'll turn the call back to Corning to discuss our outlook.

Thanks, John. On Slide 12, we provide 26 guidance ranges for adjusted EBITDA, free cash flow and capital expenditures as well as some key sensitivities. For the full year, we expect to generate between $160 million and $200 million of adjusted EBITDA. For the first half of 2026, we expect to generate adjusted EBITDA of between $90 million and $110 million. This additional guidance measure is based on past seasonality weighting where we have historically generated about 55% of total EBITDA in the first half of any given year and about 45% in the second half.

In 2026, we anticipate generating free cash flow between $25 million and $50 million as we continue to execute on our working capital initiatives and reduced capital expenditures. We expect $90 million of CapEx in 2026, down $70 million from 2025 levels.

Finally, on Slide 13, I have a few concluding remarks before moving to your Q&A. No doubt about it. 2025 was a difficult year for the broader chemicals industry. In our case, the surge in tire imports was a pain point. However, we've entered 2026 with a number of corporate strengths. You can see it in our safety performance as well as our employee engagement scores. We see it commercially through customer loyalty. Our plant reliability is improving sharply. Just yesterday, EcoVadis awarded Orion is Platinum rating, putting us in the top 1% of all companies surveyed in 2025.

From a market perspective, while leading indicators suggest conditions may be set up for a broad recovery, we remain cautious about the business environment for now. Moreover, we've taken aggressive actions footprint rationalization, cost, productivity and efficiency based on the planning assumption that the backdrop will not improve. Our single highest priority after safety is to generate free cash flow again in 2026 through the actions we've taken on cost and capital. We do see several potential upsides over the balance of 2026, including a favorable shift in trade flows, version and reshoring activity and the inevitable freight industry recover.

In addition to helping our financial performance in 2026, a pronounced inflection in any of these dynamics would help set the stage for decisively improved prospects heading into 2027. In the meantime, we've called a variety of levers, and our preparers should the trough line conditions persist.

And with that, Rob, let's open up the call for the Q&A session.

[Operator Instructions] The first question comes from the line of Josh Spector with UBS. .

I had a couple of questions around the guidance and specifically rubber. So -- if you look at the bridge, you talked about flat to slightly down volumes and the rest being contract negotiation outcomes. So it seems like you're pointing towards maybe a $60 million impact negative from contract outcomes. And One, is that right? And two, when you talked about that in your prepared remarks, you seem to talk about improved customer alignment and good outcomes for Orion. Does that mean that you guys gave up pricing to gain some volumes, and I guess it doesn't appear that you're baking in the volumes into the guidance. So I'm just trying to square all those moving parts if you can help me out.

Yes. So I think you broadly have it correctly in terms of the walk. Price is definitely the largest amount. There is some regional mix in that. As you said also, there is some volume in there as well. Specifically though, to the negotiations, what we pivoted to was just let's hold share. So I would say is the tone and where we ended up with a few customers coming through is a difficult period for them. It was a difficult period for us. together is where I put that, and we felt there was an element of collaboration in that. But to be clear on this, we don't see ourselves of having brought volume. I think our volumes will be down with the overall industry. It's just that compared to previous years, we're not going to be down more than the overall industry. We did not do the trade-off of sucking up a lot of volume loss ourselves.

Understood. That makes sense. And if I could just follow up then. So how do you think customers approach kind of this outcome. So obviously, pricing was up a good amount over the last 5 years. Is this a normalization? Or is this how you phrased it, your customers had a tough year last year, you're kind of sharing in some of the pain? Do you get some of this back if the industry improves into 2027 or how would you frame that?

Yes, I would definitely expect to get some of this back in '27.

Next question the line of Laurence Alexander with Jefferies.

It's Dan Rizzo on for Laurence. So you're guiding to roughly $50 million in free cash flow. I was wondering if that's what we could expect that kind of at the bottom of the cycle and how we should think about it if things were to improve what the top cycle looks like? I mean should we just look at stockholder averages?

Yes. Dan, the range that we put on free cash flow for next year is $25 million to $50 million. And this is through active management of the business, active management of working capital, active management of CapEx. So -- this didn't happen on it. This is because we're taking actions on things like payment terms. We're working through inventory and trying to keep inventory at a low level without risking anything in safety stock or customer deliveries. And we're managing CapEx down to a much lower level than what it's been. And so this is where we expect to be for '26, and we expect to continue to generate positive free cash flow as we go forward.

And maybe just specific, if we saw conditions reversed and some of these things that we talked about, there's maybe early signs of, obviously, that would be additive to our cash position for '26.

You mentioned kind of negotiating with your customers about pricing given the current environment. Is there anything in the contracts that if things were to kind of snap back or turn around by the middle of the year that there could be some sort of pricing escalator involved?

To be clear, I think the good thing about this industry is the contracts are honored. I think back to 2020 would have cut the other way and customers honor them. I think that to a large degree, unfortunately, in the rubber area, we're somewhat locked in. Yes, there are going be spot opportunities again people being going above their contracts. There are going to be some opportunities around that. But by and large, I think we're in this pricing range.

Our next question is from the line of John Tanwanteng with CJS Securities.

I was wondering if there's any change to how much capacity you have under contract versus a normal year? And how much you're leaving open for spot number one. Or if there's any minimums in the contracts that you may have that may not have been there before?

Sure. First of all, pick up in reverse order. In minimums, there are sometimes contract structures that don't really create a, let's say, take-or-pay environment around minimums but do give them a financial incentive around the minimums. So we have that in place. I'm sorry, John, can you take me through your 2 other parts to that question?

Yes. The first part was how much do you have under contract capacity versus your capacity versus a normal year?

Yes. Well, so I'd say it's slightly lower in the -- like if you look at the key markets in North America, for example, like tire manufacturing trended down through the course of last year. And I'd say they put out their forecast for this year sort of based on second half run rate. So that just naturally puts you at a little bit lower level than last year. Now the flip about loading for us since we took out maybe 3% to 5% of our capacity if volumes go down by the same amount, are loading itself remains on a percentage basis pretty similar.

Okay. That makes sense. And then I think you had a couple of items in Q4. If you could touch on those. The first was a large tax item. Maybe talk about that, number one. And number two, I think you mentioned in the prepared remarks in the press release, there was a timing benefit in Specialty. You may have addressed that, I might have missed it, but if you could talk about that as well, that would be helpful. .

Yes. And I'll be glad to cover the tax item. Primarily the single biggest item that we have in our effective tax rate for the year is the goodwill impairment charge that we took in Q3 and the nondeductible nature of that. And so that was the main driver. There's also some movement in valuation allowances as well. But we would expect we would return to a more normal level going forward from a tax rate standpoint.

And if I think about on the volume side where we saw the upside, and we also said mix -- so one element of that was areas like coatings, where we saw stronger demand than we had anticipated. And of course, that's a very additive for us in terms of the overall margin. .

Our next question is from the line of Jeff Zekauskas with JPMorgan.

Your accounts payable jumped to, I think, $197 million. Does that have to come down?

Well, Jeff, we're actively managing the different elements of working capital. So we look at it with accounts -- I'm sorry, we're getting looking back from your line. I didn't know if you were continuing.

No, no, it's okay. I was just wondering because your receivables and inventory, receivables year-over-year were a little bit flat and inventory came down a little bit, but payables really jumped. And so I was wondering whether that was a sustainable number or that had to come down?

Yes, Jeff. So yes, sorry, we just got a little bit of feedback. So we're actively managing all the elements of working capital, and we're looking at all those different levers as we go through the year and through each quarter. And 1 of the things that we're doing in accounts payable is to look at terms extension. And so I wouldn't say that the accounts payable has to immediately reverse. There will obviously be some quarterly activity that happens there. But we're really looking at it as a whole with inventory and how do we manage inventory levels to -- given the current demand situation. And also on accounts receivable, we've taken an active stance on accounts receivable to manage that going forward as well. So we look at it as all together, and we'll make decisions about the hall depending on how we're tracking.

Secondly, can you give us an update on the LaPorte plant and what's going on in conductive carbons?

Sure. So the conductive carbons market is a dynamic place right now with obviously a slowdown in EVs, some pickup in the large battery energy storage area [indiscernible]. For our part, and part of the way we've been able to reduce the capital for 2026 is that we have slowed down our time period on it. We would now expect to complete and be starting up the project in 2027. And our feeling is this just better aligns with the end market demand for us.

Okay. And then lastly, you guys really provided a lot of data on higher shipments. I was wondering what about tire shipments into Europe? Are they up a little bit or a lot or decline? I mean, is it a similar trend to the United States? Or is it different? How would you assess the European market?

Sure. And so 1 thing is you just don't get quite as rapid data in [indiscernible] market as you do in the U.S. But we would say that it grows, let's say, in the '23, '24 time period the tire imports to Europe were more stable, certainly than in the U.S., they didn't see the same surge that we saw in 2026 -- or 2025, excuse me.

Our next question is from the line of John Roberts with Mizuho.

And I'll just ask one here. Could you tell us where the 3 lines were that you closed and the other 2 lines that were under [indiscernible] . Have you concluded that they're long-term competitors now?

Yes. So we intentionally said that they were in the Americas and EMEA. From a competitive perspective, we thought it was advantageous not to be totally clear on that. So we're sticking with that. We've closed what we intend to close we did something, obviously, in the range of 3% to 5%, and it cuts across those 2 ranges -- or those 2 regions, excuse me. And I just think that's the best approach for Orion on that and our shareholders. .

Your next question is a follow-up from the line of Jeff Zekauskas with JPMorgan.

I think Cabot on its conference call said that you expected higher black prices to be down 7% to 9% for them. Is that the level that you're experiencing? Or is it more? Or is it less?

Jeff, excellent question there. But the difficult thing is Mike, it's hard to know exactly what 1 company is dividing the price change by, like how big is the denominator -- so that's, I think, the limitation of making these comparisons. As we make the comparison for ourselves, we do come up with a lower number in terms of what's the price cut I'd say, more or let's say, in the 3.5 range, but I'm not sure exactly how comparable those 2 things are.

And then Lastly, you have that interesting chart about Thailand tire exports by month and Indian tire exports. But the higher imports actually go up. And I think part of that is Cambodia, which is a smaller producer. Do you have any sort of general comments about the areas in which tire imports are sort of going up from -- as well as the ones where they are coming down?

Yes. So I think rather -- so I think we've picked those 2 countries because they are very large -- so Thailand is #1 to the U.S. And I guess I'm not really prepared to go through country by country, have got look for here and from there, to be honest with you. But I'd say, in general, though, the pattern of trade flows and the pattern of that underlying consumer behavior going back to Tier 2 being the biggest and Tier 1 being the second, like that's what it used to be. And so I think that's a really fundamental positive shift in terms of the underlying demand, and it's going to be good for our customers. I would also say, I think the general pattern of trade flows and tariffs are moving this in a similar direction. But from our perspective, we're not thinking on that at this point, we're taking action.

Maybe as a last question, when Report comes on, how much depreciation will that add in annual terms?

I'd say in the neighborhood of maybe $10 million.

Our last and final question is from the line of Josh Spector with UBS.

I wanted to ask just on the cost side of things. I mean, I think when I was looking at particularly rubber over the most of 2025, between some outages in and inventory revaluations through the 2Q and 3Q, there's maybe about $20 million of costs that last year we were calling more onetime. Are you adding that back into your guidance? Or is there other offsets to that, that we should be considering in the 2026 bridge?

Yes. So I think as we think about it, I'm not sure we would come to the same conclusions about the number of one-offs. Certainly, inventory revaluation for all our listeners, I know you know this, Josh, it's really based on the movement of oil price and therefore, the value of our inventories. So that will move with the overall oil situation. There's no other like really dramatic fundamentals moving that other than the general leaning out of the company even further this year. We took actions last year, we take additional actions this year. Does that help, Josh?

Yes, I could follow up more offline. The other 1 I wanted to ask about kind of the same line of thinking is just with LaPorte when you're talking about a 2027 start. Does that mean there's no real start-up costs in 2026, so that mostly remains in capital, and we'll see that in '27? Or is some of that layered into '266 at all?

No, that will be mainly '27.

Thank you. This concludes our question-and-answer session. I'd like to turn the floor back over to Corning Painter for closing comments.

All right. We appreciate everyone's time today and for the analysts. We appreciate your insightful questions. Thank you very much for that. We're looking forward to speaking with many of you over the next couple of days, and we'll be out on the road at a couple of investor forums in March and hope to see some other people there. Anyway, have a good rest of your day. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect your lines at this time, and have a wonderful day. .

Greetings, and welcome to the Orion S.A. Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Chris Kapsch, Vice President of Investor Relations. Please go ahead.

Thank you, Carrie. Good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion, and welcome to our conference call to discuss third quarter 2025 earnings results. Joining the call are Corning Painter, Orion's Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer. We issued our third quarter results after the market closed yesterday, and we have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call.

Before we begin, we are again obligated to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during the call. In addition, all forward-looking statements are made as of today, November 5, 2025. Orion is not obligated to update any forward-looking statements based on new circumstances or revised expectations.

All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the quarterly earnings deck. Any non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP.

And with that, I will turn the call to Corning Painter.

Good morning. Thank you, Chris, and thank you all for taking the time to join our conference call.

Before getting into the Q3 review, I'm excited to announce that we've hired a new CFO, a replacement for Jeff, who previously announced his intention to retire. The formal announcement will be made shortly. We had a strong slate of candidates, both internal and external. We chose a candidate with 30-plus years of financial and business leadership experience, including the past 15 years in the chemical industry. He will start on December 1. Jeff has agreed to stay with Orion through the end of the year, and will be available for further transition support through Q1 2026.

In today's call, I'll touch on Q3 results at a very high level, not the performance we expected, and certainly, we possessed much greater earnings power. Still, there are some constructive points for investors to consider. Then I want to discuss the business environment, including recent headwinds. Cutting to the chase, our biggest challenge has been soft demand in our key markets. Various Specialty end markets are being impacted by global industrial activity malaise as reflected in soft PMI readings.

In our normally resilient Rubber segment, and despite solid tire sell-through, tire production in our key markets is down. When compared to what we would consider more normalized levels, tire production in the U.S. is down about 29%, and the decline is 20% across Europe over the same time period, but closer to 35% in Western Europe. While there are reasons to believe demand will inflect positively, we are in no way counting on improved conditions. We are taking action based on the current reality.

Accordingly, we're continuing to focus on self-help actions, the things we can control, some significant, that are intended to improve Orion's structural cost and overall competitiveness. I'll discuss more on this shortly. One key goal of these efforts is to ensure the company is generating positive free cash flow, should the headwinds persist. I'll then hand the call to Jeff, who will review the third quarter financial results in more detail and discuss our free cash flow, [ revised ] guidance and some other items. Then I'll have some concluding remarks before opening up the call to Q&A.

On Slide 3, we broadly touch on the factors contributing to our Q3 performance. Adjusted EBITDA of about $58 million was slightly better than what we had conveyed in our mid-October preannouncement, but still well below expectations. The largest factors were reduced Rubber segment demand in key Western regions, soft premium Specialty markets and fixed cost absorption variances across both segments, resulting from inventory control efforts. Because of lower oil prices, we also absorbed another inventory revaluation in the third quarter. Notably, our operating teams again delivered strong plant reliability throughout the third quarter. The sustained improvement in our operating performance is beneficial on a number of fronts, which I'll touch upon in a moment.

In our Rubber segment, our customers have been feeling pressure from elevated levels of imports. Tire imports, coupled with surplus channel inventories, have affected their production rates, and thus our carbon black demand. Meanwhile, overall industrial activity softness has weighed on our Specialty business, and particularly end markets that usually consume our highest margin grades. In terms of the specific impact of this on Orion, remember, we are -- historically, we've been over-indexed to both Western markets as well as to premium tire makers. While beneficial in prior cycles, this has not been ideal during 2025, but there are signs of change. Tier 1 players are adjusting their strategies to adjust -- to defend share, including more innovation at the higher end, plant modernization efforts and more vigorously promoting their second-tier brands.

The most recent 232 proclamation is another positive. Bigger picture. Western markets have been structurally dependent on tire imports for many years, if not decades, but at like half the tire sell-through at most, not the 70-plus percent from which imports have recently been seen. As the channel rebalances towards historically more normalized level of imports, we will be very well positioned to benefit from a reversion in demand for our carbon black.

In our Specialty segment, we have disproportionately deployed resources to drive customer qualifications with some of our newest and most differentiated conductive carbon products, and these efforts are bearing fruit. On this slide, we highlight a couple of qualifications now in place, with leading supply chain players in both the high-voltage wire and cable market and the battery energy storage space. Both applications are placed on the strong data center demand growth for power. This conductive portfolio, including our high-purity acetylene blacks, is our fastest-growing group of products, and their potential relevance in applications beyond traditional EV batteries is particularly encouraging.

On Slide 4, we share some updated data related to the key tire end market. We surmised the monthly import data for July was not unnoticed, given the volatility, there's one data point spurred. Unfortunately, this is still the most recent U.S. import data available because of the government shutdown.

Parsing this by category, one sees the largest contributor to the July increase was substantially higher truck and bus tire imports, which surged over 50% year-over-year in the month of July. We point this out because this import surge could reflect an effort by certain exporting countries to beat impending tariffs. Thailand, for example, is the largest exporter of truck and bus tires to the U.S. That country's export data shows tire exports to the U.S. declining in August, the month when the country tariffs went into place for Thailand. Meanwhile, the U.S. just invoked a new 25% Section 232 tariff on diesel truck parts that will unequivocally include truck and bus tires as of November. As Section 232 proclamations are uncontested, they should prove durable, and they supersede any country-specific reciprocal tariffs.

In Europe, the tire industry continues to believe the EU's investigation into exports by China into that region will result in an initial finding of dumping in December with some retroactive implications. Preliminary U.S., Canada and Mexico negotiations have begun around the USMCA trade agreement, which is poised for a reset effective July 1, 2026. As a reminder, Canada and Mexico are both net exporters of tires and carbon black to the U.S., and Orion does not have any production in either of these 2 countries.

Finally, we continue to believe the millions of dollars of capital commitments from major tire companies, focused on adding net unit capacity and modernizing existing production facilities, bodes well for North American fundamentals over the next few years. The implied production capacity growth of 3% through 2030 would be helpful, but their reshoring intentions are more telling. And obviously, the normalization in tire local production rates would be a more substantial driver of an earnings recovery for Orion.

On Slide 5, we highlight actions that we have taken or are taking to navigate the current environment, 3 points here. First, while we believe tire manufacturing will rebound, we are not assuming any recovery in our key end markets.

Second, to enhance our competitiveness, we're implementing actions to further improve Orion's overall cost structure. Last quarter, we announced 3 to 5 underperforming production lines were being rationalized. Those actions will take place by the end of the year. We are looking more creatively at further optimization moves within our production network.

Third, we've also reexamined our non-plant headcount, work processes, engagement with outside contractors, consultants, the company's aggregate discretionary spend, amongst other things, and are in the process of further rationalizing costs across the board. Savings from this competitiveness effort will start to build in the current quarter and achieve a run rate savings in mid-2026. We'll share more on the expected benefit when providing next year's guidance in February.

In parallel to this competitiveness issue, we're also taking actions that benefit cash flow now. A highlight for sure is the sustained improvement in our overall plant operating performance. This helps on a number of fronts. In addition to improved on-time customer service levels, better quality and reduced scrap, we're also able to comfortably run our business with lower inventory levels, which in turn unlocks working capital. You can see the progress here in the past 2 quarters, and we expect a strong seasonal Q4 release, including, but not limited to, receivables, which should enable working capital to be a source of cash by approximately $50 million in 2025.

The improved operating performance at our plant reflects our organization's focused efforts on this front, but it's also a function of our having worked down a backlog of previously deferred maintenance projects. With the improved operating performance and with 3 to 5 fewer lines competing for maintenance capital, we'll be able to further prioritize our maintenance spending and focus that spend on projects that ensure reliability at our most important production sites. This all feeds into our conviction around free cash flow generation despite the decline in EBITDA. Jeff will touch upon cash flow in more detail after his Q3 review.

With that, I'll turn the call over to Jeff.

Thank you, Corning. On Slide 6, we show the overall company performance, both year-over-year and sequentially in the table, and compared with last year in the EBITDA bridge. Revenue was down 3% compared with last year despite 5% higher volumes. This was mostly a function of the contractual pass-through of lower oil prices, which have declined progressively throughout the year. Gross profit was 20% lower compared with last year despite the higher volumes. The most meaningful volume gains occurred in our lowest margin markets, while volumes declined in our more profitable Western regions.

As a result of this dynamic, the lower demand in key regions and associated adverse fixed cost absorption were the biggest drivers of the profitability decline. The fixed cost absorption had an effect of improving our working capital and increasing our free cash flow by reducing inventories. Also, an inventory revaluation tied to lower oil prices impacted gross profit as did adverse pricing. Finally, we had some favorable one-offs last year that did not repeat.

On Slide 7, the Rubber business KPIs were directionally consistent with the overall company performance. Volumes were up 7%, but revenue was lower due to the oil-related pass-throughs. Gross profit declined compared with last year, primarily a function of the adverse geographic mix, reduced fixed cost absorption in key Western regions, pricing and customer mix as well as the aforementioned inventory revaluation.

Higher volumes in the Asia Pacific and South American regions were related to our improved operational performance and annual contract outcomes, respectively, but these gains contributed minimally to EBITDA because our high-margin regions experienced lower volumes. Compared with last year, costs increased due to inventory-related cost absorption, oil price-driven inventory revaluation and other timing effects.

Slide 8. In Specialty, we had year-over-year and sequential volume gains, but the improvement was skewed towards lower-margin applications and products. In the coatings market, for example, a premium segment, demand was impacted by soft OEM vehicle builds and particularly with dispersion houses that can serve as swing capacity for the major coating companies when demand is stronger. More generally, we believe hesitant customer demand behavior, including continued just-in-time order patterns, reflect overall uncertainty. The biggest cost factor in Specialties EBITDA bridge was the adverse fixed cost absorption, largely a function of our inventory control efforts.

On Slide 9, we touch on a few other noteworthy items in the quarter. We recorded an $81 million noncash goodwill impairment charge. Our book value, which includes goodwill, is compared to the implied value of those assets when considering our enterprise value. On a positive note, we recovered $7.3 million of the 2024 fraud-related losses through legal actions and around $11 million to date. We continue to aggressively pursue recovery through a variety of legal means and insurance coverages. Finally, we completed an amendment to our credit agreement during the quarter, which increased our RCF capacity back to its prior level, expanded our bank group and gives us more overall flexibility in navigating the current business environment.

On Slide 10, we depict our latest 2025 guidance including, the EBITDA range conveyed in mid-October and the corresponding adjusted EPS expectations. Reflecting our current EBITDA guidance, along with better visibility on our progress with our working capital efforts, we expect positive full year free cash flow in the $25 million to $40 million range.

Slide 11 shows our historic capital spending, including spending expectations for 2025. Notably, we do not have a figure for 2026 on this slide as we anticipate updating investors on this spend when providing a broader outlook in February. One fluid aspect is our ability to flex maintenance capital given our improving plant reliability.

On Slide 12, you can see that we have achieved positive year-to-date free cash flow and expect further working capital improvements in Q4. As mentioned earlier, we expect full year free cash flow of $25 million to $40 million.

With that, I will hand the call back to Corning.

Thanks, Jeff. I just want to close by reiterating a few key takeaways. While the case can be made that our business is at or close to trough conditions, or that a demand inflection should materialize, we are not depending on such a scenario. We are taking action. We have reduced working capital and expect a further progress in Q4 and into '26. We're taking additional cost out and working to further optimize our assets. Our objective is to increase Orion's overall competitiveness and agility. This will serve us in combating the current headwinds, and when demand conditions normalize, we'll be positioned to achieve even greater operating leverage. We'll share more detail -- a more detailed review on these initiatives in February. Underpinning all of these activities is our resolute focus on generating free cash flow. That is our highest priority.

And with that, Carrie, let's open up the line for our Q&A discussion.

[Operator Instructions] And our first question will come from Josh Spector with UBS.

It's Chris Perrella on for Josh. Corning and Jeff, when I think about your volumes for 4Q and into 2026, what are your expectations there? And then a follow-up on how far along are you in the contract negotiations for next year? And what is that -- so far, what does that imply for pricing and spreads in '26?

So our expectations for Q4, like the decline, if I'm comparing it to prior years, that's pretty much all volume largely in that area. So we're expecting people to take longer seasonal shutdowns, that kind of thing, and be managing down their own inventory in Q4. That's the signal we have there.

I think for next year's volumes, in terms of manufacturing, as I indicated, there's a case to be made that inflection is upon us, but we're not counting on that. And I would say, in terms of negotiations, there, as we said and predicted last quarter, we didn't see settling quickly in our interest. They continue to drag on. And I would say all in all, the negotiations are behind schedule compared to a more typical year. So I think in terms of exactly what's going to be out there for next year in terms of volume, we're really going to have to wait until we conclude the negotiations.

I appreciate that. Anc can you just -- what's the impact of La Porte on volumes and earnings in 2026?

I mean, volume-wise, it's not a high-volume plant to begin with. And I think overall, with the start-up costs and all that, I would expect it to be negative in 2026.

And our next question comes from John Tanwanteng with CJS Securities.

My first one, just assuming that import tire pressure is sustained through '26 at '25 levels, what is the potential for earnings improvement into '26 in RCB just between -- with all the movements you're making in costs, your customers moving to more value positioning? Just help us understand what's possible, the volumes are flat. And if you have any commentary on pricing spreads, that would be helpful.

Yes. So I think the big question in 2024 is -- or I'm sorry, 2026, is going to be the outcome of the negotiations, both the volume a particular company wins and the margins that come with that. I think that's sort of like the big unknown. We will be working hard on some of the efficiency projects that I mentioned. But I think a big impact for next year is going to be the outcome of the negotiations. And it's obviously commercially sensitive, and we are like in the middle of it right now.

Okay. Great. And then do you have any expectations for Specialties next year, whether it's market improvements, mix improvements? Just help us understand what your thoughts are on the Specialty side.

All right. Well, we'll do our -- look, we'll give our official guidance for next year in February. I think what will be guiding our views on that are, of course, what we hear directly from customers. I think you can get a sense of that by looking at how general manufacturing is going, where PMI goes. I would also say, OEM builds, right, that's an important market for that space. So those will be -- I think things you could look at that would give you a sense of how we see that business developing.

[Operator Instructions] Moving on to Laurence Alexander with Jefferies.

This is Kevin Estok on for Laurence. Just curious if you could give your thoughts around maybe what an industrial rebound would look like, I guess, let's say, in 2026 or 2027? And I guess just curious what you think it takes to get us there?

Sure. I mean -- I think industrial recovery would say taking us back to things that looked more like pre-COVID. And I would think in that kind of environment, we'd find that we're essentially nearly sold out in our key markets at that point, with strong demand coming from OEMs, strong demand from tire manufacturing, more normalized trade flows.

I think the really positive thing here is that tire sell-through remains really solid. Tire sell-through is at the conditions I just mentioned, right? So it's not like that is the fundamental challenge here. Yes, shipping, trucking activity is off a little bit, but passenger car is really quite strong.

The big question is the success of our customers in the west around their own market share. And of course, they're being helped by trade policy right now. I think that's a big one. I would say in the Specialty area, a pickup in construction, a pickup in automotive, those are things that would be very helpful and constructive in that area. Basically, the industrial economy getting back to a more normalized level.

I'm moving next to John Roberts with Mizuho Securities.

John Roberts for John Roberts again. Do you think the tire importers into the west are receiving government support or maybe lower raw materials, I don't know, Russian rubber or Russian oil for carbon black that allows them to continue to import into the U.S. in spite of the tariffs?

Well, I think if you look at it, the 232 tariffs, let's say, of 25%, to be clear, that's not going to be enough to totally price out imported tires. The U.S. and Europe cannot possibly make all the tires they need, right? Before all this happened, it was about 50% of the tires were imported to the U.S., very similar into Europe. So we're never talking about, it has to get to a point where they are pushed out. What I think it has to get to the point where customers are more returning to their normalized brands.

So one magazine recently published that just in October of this year, Tier 2 tires had the greatest demand. That's more like normal conditions. The last -- or so far this year, it had been Tier 3 tires that had the highest demand of the 4 tiers that they track. So there's a little bit there of customer sentiment moving back to a different value proposition in the tires they buy.

And then number two, like the help in the tariffs is enough to like close the gap. So the gap between the Tier 2 and the Tier 3 and most Tier 1 companies have a Tier 2 brand. But that closes up to where people choose that value proposition. It's -- again, it's like there's no effort here. There's no dream of pricing them all out, that's impossible. But it's a matter of just can you close the gap enough, the consumers will shift back. And I think that's a concrete sign that, yes, this is all possible. This is all doable. And I think things tend to revert to their norm and perhaps this is the beginning of it, but we're not going to count on that.

John, I think you also -- depending on the results of the antidumping situation in Europe, you may also see an impact from that. And that might give you some insight into either the profitability that they're dealing with in the short term or even their willingness to operate at a very low or negative return.

Is it fair to say, it sounds like the recovery is more dependent on the lower-end consumer improving than it is on the tariffs? I mean the tariffs help, but it sounds like we need higher tire prices.

Well, I think it's 2 things. The point I would like to make, it's not just relying on government action, right? There's an element for industry, and there's some certainly plus in the trade policy to overcome some of the, perhaps unfair disadvantages that are there that you mentioned earlier. I think the 2 of those together are important.

But I would like to stress, I think industry and our customers, there's a role there for self-help. They can continue to innovate on their top brands, make them more attractive, continue to approach their -- to promote their second-tier brands, perhaps shift some production from one to the other. These are all things within their control and that you see some signs of them taking action in that direction, some more than others.

And we'll take a follow-up question from Josh Spector with UBS.

It's Chris again on for Josh. From -- as I think about next year, what are some of the recurring costs in 2025 that won't be there in 2026?

Well, so I think one thing that's been with us all year long, I'll let Jeff go into this, Chris. But I think one thing that's been with us all year long has been the inventory adjustments. And that's really a factor of the trend of oil pricing, and we pass that through, but there's always an element of that. Should we just assume stable oil prices, then that would go flat for us. I mean if they went up, it would revert and go the other way. But I mean that's certainly been a drag this year.

Yes. If you think about it to date, we've taken our inventories down by $34 million. So that's a pretty significant reduction in the inventory, and associated with it is the cost absorption related to pulling that inventory off the balance sheet and running it through the P&L. I think that's the biggest thing.

Going the other way, obviously, we've taken some cost out this year. Many of them are permanent, but there's a variable comp component that's not permanent, so that would have to add back in. But as Corning mentioned earlier, we have some pretty aggressive cost actions that we are going at currently and going into early 2026, that will help us reduce our costs next year and become more competitive.

This now concludes our question-and-answer session. I would like to turn the floor back over to Corning Painter for closing comments.

Well, I'd like to thank you all for your time and attention today, and to thank everyone for their questions. They were insightful and useful, and I think, added value for all our investors. So thank you very much for that, and we look forward to be speaking with investors during the balance of this quarter. Thank you all. Have a good rest of your day.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Ladies and gentlemen, greetings, and welcome to the Orion S.A. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris Kapsch, Vice President of Investor Relations. Please go ahead.

Thank you, Ryan. Good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion, and welcome to our conference call to discuss second quarter 2025 results. Joining our call today once again are Corning Painter, Orion's Chief Executive Officer; and Jeff Glajch, our Chief Financial Officer.

We issued second quarter results after the market close yesterday, and we have posted a slide presentation to the Investor Relations portion of our website. We will be referencing this deck during the call. Before we begin, we are again obligated to remind you that some of the comments made on today's call are forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the Securities and Exchange Commission, and our actual results may differ from those described during the call.

In addition, all forward-looking statements are made as of today, August 7, 2025. Orion is not obligated to update any forward-looking statements based on new circumstances or revised expectations. All non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release and the quarterly earnings deck. All non-GAAP financial measures presented in these materials should not be considered as alternatives to financial measures required by GAAP.

And with that, I will turn the call over to Corning Painter.

Good morning. Thank you, Chris, and thank you all for taking time to join our conference call. Before discussing some industry trends and digging into Q2 results, I wanted to briefly express my gratitude to Chief Financial Officer, Jeff Glajch, who after nearly 4 years with Orion will be retiring in the fourth quarter. Jeff's leadership and guidance will be genuinely missed throughout the organization. We've commenced a formal search process and we appreciate Jeff's intent to help ensure a smooth transition through the end of the year.

Turning to Slide 3. The $69 million of adjusted EBITDA we generated during Q2 was in line with our expectations, and that was despite demand headwinds that became more acute during the quarter. Overall, volumes were up 3% year-over-year in the quarter, but declined a little more than 4.5% sequentially markedly improved manufacturing performance at our plants was a key driver of the higher sequential earnings.

As we had indicated last quarter, the level of unplanned downtime during Q1 was anomalous and our efforts to drive better plant performance through operational excellence initiatives are now starting to bear fruit. I mentioned demand headwinds. Here, we experienced this in both segments in Q2. Affecting our rubber business, there was a surge of tire imports into the U.S., presumably to be the early May automotive sectorial tariff deadline. We believe this continue to weigh on local tire manufacturing rates and therefore, our demand.

In Specialty, and you've seen this across the broader chemicals segment, uncertainty resulting from the lack of tariff clarity possibly some destocking in polymer end markets and economic malaise more generally have translated into a softer demand environment and Orion was not immune. Despite this difficult backdrop, some of our more profitable specialty product lines have exhibited resilience, and we continue to make tangible progress with new customer qualifications for our higher-growth conductive grades, lithium-ion batteries, energy storage systems, high-voltage wire and cable applications and conventional battery markets, amongst others. This commercial trajectory for our conductives product line in the healthy double-digit range in terms of CAGR, helps position the Specialty segment for longer-term earnings recovery.

Near term, the overall Specialty demand trends have remained choppy. However, the recent propensity for customers to place orders in a just-in-time fashion could suggest inventories are quite low through the specialty supply chain. The subject of tariffs, of course, remains topical. We continue to impact that the automotive tariff rates which include replacement tires will help normalize the level of tire imports into the U.S., diminishing pressure on top-tier local tire manufacturers, our customers. We believe this will translate into improved rubber segment demand starting late this year or early next year.

Most recently, the attention has shifted to India. I don't think that 25% plus 25% tariff is definitive. But even the 15% to 25% tariff would be impactful. While less important to the overall Orion Masa, this will make carbon black imports into the U.S. less economically viable. Indian imports currently satisfy about 4% of North American market demand. Not coincidentally, the 2026 negotiations are underway, a bit earlier than normal in our view. My read is that customers started early for 2 reasons. First, due to the elevated tire imports their consumption of Carbon Black has been disappointing so far into 2025. They like that backdrop for negotiations.

Second, the 2026 is looking more encouraging. And tire makers want to close negotiations before this becomes more apparent. The U.S. Section 232 automotive parts tariffs and the announced reciprocal tariffs on India improves the set up. Meanwhile, in Europe, the Chinese tire dumping investigation is underway. And you have to ask yourself if the Europeans are really going to keep the door wide open for their crucial automotive segment. The impact of these moves has not yet been felt in business trends.

And by the way, on top of everything else I just mentioned, another risk factor for tire makers is Carbon Black and other auto-related imports from Canada or Mexico potentially being in play given that the USMCA comes up for resetting mid-2026. We may hear more about what the U.S. administration's intention here as early as this October.

The last point on this slide, investors should know we are not standing still, simply hoping for the challenging backdrop improve. Here, we mentioned self-help initiatives that are underway expect more elaboration on these efforts over the balance of 2025, beyond improving productivity and lowering costs. We've also shifted our capital allocation priorities towards debt reduction over share repurchases and at least in the near term.

On Slide 4, we share recent tire industry data and our current view of how tariffs may affect these trends. Despite all the noise and volatility, the originally contemplated automotive tariffs have remained steady at 25%. And the early May deadline for that targeted segment has come and gone. We believe this tariff in position is what spurred the surge of imports into the U.S., as shown on the top slide -- as shown on the slide, excuse me, on top of already elevated levels. Recall, a historically more normal level of tire imports as a percentage of industry sell-through has been in the low 50% range.

In the past 1.5 years or so, this level has increased to more than 60% -- 65% by some counts. The tire industry channel shifted to lower-value tires, including imported Tier 3 and Tier 4 brands in response to the consumers' reaction to inflation. But we think the stronger cost of ownership offering of the world's leading tire manufacturers, including their Tier 2 offerings combined with trade policy shifts will reverse this dynamic.

And as you can see in the top left chart, monthly tire imports surged when the auto import tariffs became a barren and remained elevated through May. This has, in turn, weighed on U.S. tire production as depicted in the USTMA data shown here in the lower left chart. We expect June data to show reduced tire imports. I think tire companies want to frame the annual negotiations before this kind of market data becomes more apparent. Given this recent import surge, tire channel inventories, certainly for the lower tier offerings are likely elevated. From customer engagement, we've cleaned their expectation for channel inventories to be drawn down in the second half of 2025 possibly towards the end of the year and higher production rates may then recover.

When portraying U.S. tire imports is elevated, but likely to normalize with some assistance from tariffs, we're often asked by investors. Well, how do you know the increased import levels are not structural in nature. We've added Slide 5 to help answer this question. Here, we show there is $7 billion to $8 billion of capital so far the major tire customers have committed to projects in North America alone to expand or modernize their tire production capacities. These are all investments scheduled to ramp in the next 4 years, considering -- contributing to a 3% to 3.5% North American CAGR through the end of the decade. This CAGR is net of some closures that have been announced.

We believe these investments are just 1 example of the reshoring and deglobalization trends that are taking place. Essentially, all of these project announcements have predated the new tariff paradigm.

In terms of Carbon Black, it's not unreasonable to expect little or no greenfield capacity expansion in North America, at least over the next 3 years based on the absence of project activity. Back to the tire onshoring trend, there's a similar dynamic at play in Europe, albeit although to be fair, there have been more closure announcements of all of our less competitive factories in that region.

On Slide 6, we wanted to touch upon our recently announced production rationalization and some other self-help initiatives intended to bolster our performance under a scenario where the business cycle trough is extended. The decision to shutter 3 to 5 production lines representing less than 5% of our global capacity as part of a broader portfolio optimization effort targeting lower margin business. This initiative was based on data-driven analysis, allowing us to examine cash flow performance beyond regions and plants and all the way down to production line, product grades and even by customer.

Going forward, we'll have fewer reactors competing for maintenance capital, so we can also sharpen our pencil on our maintenance spend. We simply cannot have assets on hold when a customer's decision to source from an undependable supply chain fails them. Shifting gears a bit. Part of the reason this rationalization decision is prudent reflects the progress we're making with our own operational excellence programs. These initiatives are gaining traction across our portfolio and building momentum. To be clear, we're not sitting around, waiting for demand inevitable recovery. In our current scenario planning, we contemplate subdued demand over the balance of 2025. To this end, we're executing on the additional cost reductions that we mentioned last quarter. We've stressed that driving a sharp improvement in free cash flow is our greatest priority, and that remains the case.

Here, we've made good progress, including the extraction of $27 million from working capital in the second quarter alone, primarily from inventories. We also expect the Q1 increase in receivables to reverse in Q4. The confluence of these and other working capital actions, along with lower CapEx underpin our ability to reaffirm our previously conveyed free cash flow targets. Jeff will elaborate more on this in a few moments.

And with that, I'll hand the call over to Jeff who will walk you through the second quarter results in more detail.

Thanks, Corning. Before I start, I do want to thank Corning for his kind words earlier. As we announced last week, I have decided to retire in a couple of months but I intend to not only support Orion's search for a new CFO, but then to continue with the transition through at least year-end and perhaps even into early 2026. I've enjoyed my 3.5 years of Orion I decided to retire for personal reasons and have only true respect for our Orion team. Finally, my opinion is with the tariff headwinds that Corning mentioned earlier, we could be on the precipice of a ramp-up in volume as we look at 2026.

Now on to our Q2 results. On Slide 7, you'll see our business exhibited resilience in Q2, with volumes improving 3% year-over-year. We saw growth in our rubber business, but a decrease in specialty due to heaven across our customer base, particularly related to automotive OEMs and the polymer supply chain, our highest volume specialty end market. While total Orion profitability was down year-over-year, reflecting adverse geographic and product mix and pricing, these variances were partially offset by lower cost and a greater cogen contribution.

Gross profit per ton improved sequentially, thanks largely to better operating performance, enabling greater fixed cost absorption. Overall, cost improvements benefited from self-help actions which were obscured by the adverse inventory revaluation, which we had called out on last quarter's call due to lower average oil prices across Q2.

On Slide 8, our rubber business delivered 7% higher volumes year-over-year and 4% higher adjusted EBITDA. The volume improvement was expected a function of the 2025 contract outcomes and would have been better if not for import-related headwinds across the western markets in which we operate. As Corning noted, imports continued to increase compared with already elevated 2024 levels. Our China business also delivered higher volumes, a function of improved plant operations there. Overall, rubber volume gains were skewed towards lower-margin regions, hence, the adverse mix dragged on the volume contribution in our year-over-year EBITDA bridge.

Our gross profit per ton recovered sharply on a sequential basis in Q2, thanks mostly to improved plant performance. However, this metric would have been stronger if not for the headwinds from the elevated imports into our highest performing rubber markets. In the EBITDA bridge, you can see a strong cost performance more than offsetting price mix, thanks to better absorption, a higher cogen contribution, and lower fixed costs despite adverse timing related to pass-through provisions.

On Slide 9, in Specialty, main issue in Q2 was soft demand due to the macro backdrop and related customer hesitancy with tariff uncertainty translating to weaker trends in manufacturing sectors, especially in our key North American and European regions. Specialty volumes were down 8% year-over-year and 6% sequentially, and the sluggish volumes were a major factor in our EBITDA bridge.

Product pricing and mix was a positive contributor to EBITDA on a year-over-year basis, but profitability, including GP per ton degradation was hurt by the inventory revaluation I mentioned. This transient impact, roughly $50 per ton was only partly offset by more favorable cogen contribution and reduced cost. The euro's appreciation was late in the second quarter, so FX translation was not a major driver in our P&L results.

Slide 10 shows our latest guidance. reflecting the surge in import headwinds affecting our rubber segment and overall macro uncertainty impacting both segments, we are narrowing our adjusted EBITDA guidance by reducing the high end of our prior range. Note also, considering improved operations, coupled with persistently soft overall demand backdrop we anticipate production rates to further lower inventories as we drive to achieve our free cash flow commitment for the year. You can see on this slide that we are maintaining our free cash flow expectations of $40 million to $70 million or $55 million at the midpoint.

Slide 11 simply shows our continued focus to reduce CapEx not only in 2025 but in 2026 as we've discovered over the past -- as we've discussed over the past few quarters.

Slide 12 shows the higher expectation for cash being extracted from working capital. We've already made substantial progress in Q2 in inventories. We expect meaningful benefit simply from the normal seasonal accounts receivable released during Q4. We have also launched initiatives which should serve as insurance to achieve this free cash flow target. After achieving our commitment in 2025, higher free cash flow conversion is a straightforward lift next year simply from lower capital expenditures. Looking forward, we have shifted our capital allocation priority from buybacks to debt pay down. That will be the priority through at least the balance of 2025 and likely into 2026. We finished the quarter with a net debt-to-EBITDA ratio of 3.55, one turn higher than the high end of our target range. I would note that the stronger euro at quarter's end increases metric 15, 20 basis points due to our euro translation to dollar -- euro debt translation to dollary, sorry. Efforts over the balance of this year and into next year will be focused on both reducing the numerator and increasing the denominator to improve this metric.

With that, I will turn the call back to Corning.

Thanks, Jeff. Before moving to Q&A, let me just summarize a few key takeaways captured on Slide 13. We're pleased with the sequential earnings improvement partially enabled by our better overall plant performance. We look to build on better operating metrics through continuous improvement and manufacturing excellence programs, which, as we mentioned, are gathering momentum. Despite the in-line second quarter result, and let me be clear about this point, we by no means complacent. Our intensified focus goes beyond simply weathering the challenging backdrop and is focused on positioning Orion to demonstrate much greater earnings power for winning the business cycle and other factors inevitably inflect in our favor. .

We do expect to see demand benefit from the new tariff paradigm in late '25 or early 2026 even as our tire customers are hardly likely to acknowledge this reality as supply contract negotiations for next year progressed in earnest. Finally, I just want to reiterate that through all of this, driving free cash flow improvement remains the company's highest priority after safety at this juncture. If there are technical decisions that improve cash flow at the expensive P&L we will make that trade all else equal.

In short, we fully intend to achieve our 2025 free cash flow guidance and setting us up for even greater free cash flow next year.

And with that, Ryan, please open up the lines. We'll be happy to take people's questions. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Josh Spector from UBS.

It's Chris Perrella on for Josh. I just wanted to ask about the step-up in earnings in the second half of the year compared to the 2Q base, how much of that is volume growth? How much of that is the self-help? Can you just kind of dig into the details of how you see -- or what's in your assumptions in the guidance?

Sure, Chris. This is Jeff. A couple of things. First off, if you recall in our Q2 numbers, we have this $5 million inventory revaluation. So Q2, excluding that would have perhaps been more in the mid -- closer to the mid-70s than than where we were at. I think as we look forward, from a volume standpoint, I wouldn't see it necessarily a step up in volume. I think if we look at the rubber business, for example, compared to where we were in Q2, I think we would be relatively in line with that, which will still be year-over-year growth. But on a sequential basis, wouldn't necessarily see much of an increase. I think specialty, maybe we see a little bit of a pickup in volume. But again, given where the markets are right now, it's a little bit challenging. So I think really it's -- first off, it's that more normalization of Q2 and then I think as you noted, some of the cost tax we've taken, while we benefited so far, we will see at least that benefit in the second half of the year.

I appreciate the color on that. And then the question on the cash balance at the end of the year. What actions do you have? Or could you elaborate a little bit more on other levers that you have to pull yet to hit that target?

Sure. So if you think about working capital, there's 3 levers, there's receivables, there's payables, and there's inventory. We've done quite a good job on receivables over the past couple of years starting in 2023. So not a lot there right now. The inventory -- we took our inventory down, as Corning noted $27 million in Q2. I'd say between now and Q4, I think there's more of an opportunity to take that down. It may not happen in Q3 and part of the reason would be we've got some shutdowns in early Q4, some turnarounds and when we do that, we want to build up a little inventory beforehand. So you probably won't see in Q3, but perhaps you'll see a little bit in Q4. And then on the payable side, we've got some activities that we're looking at that. I don't want to go into too much detail yet but they may help us as we get to it later into 2025 and then also further more in 2026.

I appreciate that. And Jeff, enjoy the retirement. .

Thanks, Chris.

The next question comes from the line of Kevin Estok from Jefferies.

So just curious on the tariffs. I guess [Technical Difficulty]

Kevin, I do apologize to interrupt you, but your audio is not coming in clear.

You hear me now?

A little better. I think if you just try talking really softly or slowly, let's try that. .

Okay. So on tariffs, I was just wondering, I guess, do you expect production to initially come back to Mexico, let's say, before the U.S.? And just on full tailwind itself. Have you thought about or quantify...

Kevin, again, I do apologize, you audio is not coming in clear.

So Kevin, I heard the first half of that. Do we expect production to be revert more to Mexico than the U.S.? No, we don't. I think it would be broadly felt -- maybe if you can try a different line and then get back in the queue, it's very hard to hear you.

We take the next question from the line of Jon Tanwanteng from CJS Securities.

I was wondering if you could talk about what you're expecting in Q4. It's going to be the traditional seasonal downtick or if maybe there's more tariff certainty, perhaps rates are lower, inventories are drawn down, if that might be a little bit different or people might be still cautious.

Well, it's -- Jon, excellent question, and I wish I can tell you a great certainty of what's going to happen in Q4. I think there's a possibility we could see a stronger Q4 given the whole tariff paradigm. But it's I think very early to call that out with a lot of confidence right now.

Okay. Great. And then if you could just expand a little bit more on the structural versus temporary discussion on imports are imported tires at the lower grades that you're talking about, are they -- with the tariffs now, are the prices now in line with what domestic tire companies offer your customers? Or is this still a price gap, I guess, with the tariff there?

Yes, I'd say there's still a price gap, and it's a little bit apples to oranges. So the domestic producers, which are the global companies, not just U.S. companies who operate in the United States, I would say they primarily associate them with their Tier 1 brands, just about all of them have a Tier 2 brand as well. And in both of those brands, they tend to be offering a tire, which comes with a mileage care warranty and things like that. So the value proposition they're offering is somewhat better than, let's say, a Tier 3, Tier 4 imported tire is.

So I think what the tariffs achieved, the 25% automotive tariff is it closes that gap quite considerably for them in terms of selling against it. And you do see some signs of those major premium tire companies investing a bit more advertising in their second tier lines right now. And I think, yes, they still cost a little bit more, but they offer you more of a warranty, there's more there to sell in terms of value-add cost of ownership. Does that answer your question, jon?

It does. I'm just curious as to if you've seen any reversion to the higher value versus the lower price in the end markets from just a consumer mix perspective or if that continues to trend towards the lower price?

I wouldn't say we're like our position in the supply chain that we're going to be the first guys to see it. What I would say is that for some of the majors, their second-tier brand tire factories have performed better in the course of this year than their premium lines in terms of simply volume taken relative to plan.

Okay. Great. Last one, if I could sneak one in. Just any incremental tariff impacts from the August 1 announcements? I think you mentioned India. I don't know if there's anything else that was a headwind or tailwind that might impact you guys. Any update...

So the biggest thing for our customers is simply the 25% automotive tariff, and that includes replacement tires. And that's the 232, it's a section separate item. So not really part of the reciprocal tariffs. So even somebody who has a 10% tariff rate, for example, automotive parts are subject to that. So that's, I think, a real positive, steady thing for it. There's not a lot of carbon black imported into the Americas. But in the U.S., there is some coming out of India. So I think 25% just yesterday, another 25% total of 50%. I'm not saying I'm sure it's going to stay at that level. But any elevated tariff level on India is also something that we make that imported carbon black from India, I think just less economically viable. I think a tariff in the 10%, 15% to 25% range would be meaningful as well in that space.

The next question comes from the line of John Roberts from Mizuho Securities.

Thank you, and thanks, Jeff, for your service. On Slide 4, is the implication that the area between the 2025 import line in the upper dash line, that area represents the excess imports. So do we need to see that 2025 line go below the dash line by an equal area to rebalance the market?

Well, I think any decline in that prior to where it was in '24 or [indiscernible], whatever, in 2019, any downward movement in that is improvement from the perspective of our customers, our customers doing better is ourselves doing better. So if you're talking about getting back to when it was more like in the low 50s, certainly, let's say, like 2029, 2019, excuse me, was the time frame when we're in that kind of range. Is that what you're after there, John?

Well, yes, I just didn't know how far down we have to go to, you would think inventories would be, say, normalized?

Well, so inventories is a different question, right? So I think inventory is this question of the surge of product came in, and that's going to have to get sold through, and that's going to be out there at the tire dealers right, in their shops, competing with those, let's say, Tier 2 brands of the major tire companies. And our entire customers, nobody has great visibility to that. Our tire customers would say they expect that to be turned down, let's say, over the course of the remainder of this year. But in terms of higher manufacturing, the underlying signal for where this market is going, that's all about this import rate. And any downward movement in that is good and you can just pick your year and say, well, what would it be like if it was less than '22, '23 all the way down to '19 but the speed with which it declines is probably says a little bit about how quickly the inventory gets burned down, but I think the wheel signal there is just for what we can expect for demand going forward.

Okay. And then the [indiscernible] transaction in Mexico seemed like a unique opportunity for them, and you earlier did the LyondellBasell transaction in Europe. Are there many other captive carbon plants around the world that we could see some further consolidation here? .

Very limited in terms of captive, yes. I mean, there is consolidation that's possible against maybe some of the Speciality some of the smaller carbon black companies that are out there. I think that's possible. But in terms of really a captive thing, it's quite limited.

Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to Mr. Corning Painter for his closing comments.

Okay. Well, look, thank you again for your attention. Once again, Jeff, thank you very much for your service over the last 3.5 years. We'll miss you. We will be back out on the road meeting with investors. We'll be at the Mizuho, the UBS and the Jefferies conferences in New York in the coming weeks, and we look forward to engaging with many of you at those events in person. So I wish everyone a good rest of your day. Thank you for your time.

Thank you. Ladies and gentlemen, the conference of Orion SA has now concluded. Thank you for your participation. You may now disconnect your lines.