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Orion Engineered Carbons S.A. Announces Second Quarter 2014 Financial Results

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Orion Engineered Carbons S.A. (“Orion” or the “Company”) (NYSE:OEC) , a worldwide supplier of specialty and high-performance carbon black, today announced results for its second quarter of 2014.

“We were pleased with our second quarter results, as we grew our sales volume and improved our contribution margin, which enabled the Company to deliver solid Adjusted EBITDA growth of over 8%. During the quarter we delivered improved performance from both of our segments, with strong volume growth in our Specialty Carbon Black segment and expanding margins in our Rubber Carbon Black segment.” said Jack Clem, Orion’s Chief Executive Officer.

Clem continued, “We are also very pleased to have successfully completed our initial public offering in the third quarter, which was the culmination of three years of hard work and successful execution. Our IPO was followed by the successful syndication of our term loan under a new credit agreement. This recent refinancing, together with the recapitalization associated with our IPO provides Orion with greater flexibility in our operations, substantially reduces our overall interest expense, and provides for additional liquidity for future growth investments and future payment of dividends. We will continue to execute our strategic plan and look forward to our future as a public company.”

In EUR Fiscal Year 2014 Fiscal Year 2013
Second Quarter First Six Months Second Quarter First Six Months
Revenue 341.3m 671.8m 350.6m 691.7m
Volume (in kmt) 255.9 505.2 250.9 493.2
Contribution Margin 109.0m 210.1m 103.5m 201.9m
Contribution Margin per metric ton 426 416 412 409
Operating Result (EBIT) 26.8m 55.3m 29.1m 54.1m
Adjusted EBITDA 56.0m 106.0m

51.7m

97.0m
Profit or loss for the period (6.4m) (6.8m) (1.0m) (7.5m)

Pro forma profit or loss for the period (1)(4)

5.9m 14.3m N/A N/A

EPS (2)

(0.15) (0.16) (0.02) (0.17)

Pro forma EPS (3)

0.09 0.24 N/A N/A

Notes:

(1) Pro forma profit or loss for end of Q2 2014 prepared on the same basis as the pro forma financial information included in our prospectus dated July 24, 2014 (the “Prospectus”), filed in connection with our initial public offering (the “IPO”), now reflecting the final outcome of refinancing Orion’s debt, completed recently.

(2) EPS calculated using profit or loss for the period and based upon actual number of shares of 43,750,000 as of June 30, 2014.

(3) Pro forma EPS calculated using the pro forma profit or loss for the year to date, and based upon 59,635,126 million shares outstanding post IPO.

(4) Pro forma profit for the six months period ended June 30, 2014 includes adjustment items of EUR12.6 million to EBITDA. These adjustment items include IPO related costs (EUR5.5 million), consulting fees (EUR5.8 million) and restructuring expenses (EUR1.3 million) and reconcile the difference between EBITDA and adjusted EBITDA. Pro forma profit for the six month period ended June 30, 2014 based upon Adjusted EBITDA (i.e. after adjusting for IPO related costs, consulting fees and restructuring expenses) totaled EUR0.54 per share. This calculation is based on an underlying group tax rate of 35%.

Second Quarter 2014 Overview

Revenue decreased by EUR9.3 million, or 2.7%, to EUR341.3 million in the second quarter of 2014 from EUR350.6 million in the second quarter of 2013. Sales volume increased by 2.0% in the second quarter of 2014 compared to the second quarter of 2013. This increase in sales volume contributed an increase of revenue of 2.0%, or EUR6.9 million, in the second quarter of 2014 compared to the second quarter of 2013. The volume related increase of revenue was offset by mainly negative impacts to revenue resulting from changes in foreign currency exchange rates.

This sales volume increase comprises 5.0 kmt resulting in a sales volume of 255.9 kmt in the second quarter of 2014 as compared to 250.9 kmt in the second quarter of 2013, reflecting overall increased sales volumes in both the Specialty and Rubber Carbon Black segments in the Americas.

Contribution margin increased by EUR5.5 million, or 5.3%, to EUR109.0 million in the second quarter of 2014 from EUR103.5 million in the second quarter of 2013, overall driven by Specialty Carbon Black sales in Europe.

Adjusted EBITDA increased by 8.2% to EUR56.0 million in the second quarter of 2014 from EUR51.7 million in the second quarter of 2013, reflecting the impact of the increased contribution margin.

First Six Months 2014 Overview

Revenue decreased by EUR19.9 million, or 2.9%, to EUR671.8 million in the first six months of 2014 from EUR691.7 million in the first six months of 2013 despite a sales volume increase of 2.4%. The revenue decrease was mainly related to foreign exchange rate changes.

This sales volume increase comprises 12.0 kmt resulting in a sales volume of 505.2 kmt in the first six months of 2014 as compared to 493.2 kmt in the first six months of 2013, driven by increased sales volumes in the Specialty Carbon Black segment in the Americas. Sales volumes in our Rubber Carbon Black segment increased in the Americas and to a lesser extent in South Korea but were lower in Europe and South Africa.

Contribution margin increased by EUR8.2 million, or 4.0%, to EUR210.1 million in the first six months of 2014 from EUR201.9 million in the first six months of 2013, mainly due to the impact of the higher sales volume in the Specialty Carbon Black segment in the first six months of 2014 compared to the first six months of 2013.

Adjusted EBITDA increased by 9.3% to EUR106.0 million in the first six months of 2014 from EUR97.0 million in the first six months of 2013 and as a result of the increase of contribution margin.

Quarterly Segment Results

Specialty Carbon Black

Revenue of the Specialty Carbon Black segment increased by EUR1.9 million, or 1.9%, to EUR103.6 million in the second quarter of 2014 from EUR101.7 million in the second quarter of 2013, as a result of increased sales volume which offset the impact of exchange rates on our sales revenues. Sales volume of the Specialty Carbon Black segment increased by 2.1 kmt, or 4.2%, to 52.5 kmt in the second quarter of 2014 from 50.4 kmt in the second quarter of 2013, reflecting increased demand in the Americas. Gross profit of the Specialty Carbon Black segment increased by EUR2.2 million, or 6.5%, to EUR35.9 million in the second quarter of 2014 from EUR33.7 million in the second quarter of 2013, in line with the higher sales volume despite an increase in depreciation associated with our elevated capital investment expenditures, consistent with our strategy. Adjusted EBITDA of the Specialty Carbon Black segment increased by EUR1.0 million, or 3.9%, to EUR26.8 million in the second quarter of 2014 from EUR25.8 million in the second quarter of 2013 driven by stronger gross margins primarily in Europe, offset by investments in technical sales and marketing.

Rubber Carbon Black

Revenue of the Rubber Carbon Black segment decreased by EUR11.2 million, or 4.5%, to EUR237.7 million in the second quarter of 2014 from EUR248.9 million in the second quarter of 2013 due to decreased carbon black oil prices mostly associated with the impact of exchange rates on our selling price. Sales volume of the Rubber Carbon Black segment increased by 2.9 kmt, or 1.4%, to 203.4 kmt in the second quarter of 2014 from 200.5 kmt in the second quarter of 2013. Gross profit of the Rubber Carbon Black segment increased by EUR2.1 million, or 4.8%, to EUR43.9 million in the second quarter of 2014 from EUR41.8 million in the second quarter of 2013 despite an increase in depreciation and amortization associated with additional capital investment expenditures, primarily as a result of fixed cost savings from the closure of our Portuguese plant and improved manufacturing efficiencies associated with both headcount savings and our capital investment program, which also provided cost and yield improvement associated with feedstock use. Adjusted EBITDA of the Rubber Carbon Black segment increased by EUR3.2 million, or 12.6%, to EUR29.1 million in the second quarter of 2014 from EUR25.9 million in the second quarter of 2013, reflecting the development of gross profit without the impact of depreciation and amortization.

Balance Sheet and Cash Flow

As of June 30, 2014, the Company had cash and cash equivalents of EUR42.8 million.

The Company’s non-current indebtedness as of June 30, 2014 was EUR740.1 million, comprising liabilities to shareholders of EUR259.8 million and financial liabilities of EUR480.3 million. Current liabilities to banks as of June 30, 2014 totaled EUR46.3 million. As detailed in the unaudited pro forma condensed consolidated financial statements attached to this earnings release, the Company’s indebtedness was refinanced in connection with the IPO and significantly reduced to EUR665 million less transaction costs of EUR21.8 million.

Cash inflows from operating activities in the second quarter of 2014 amounted to EUR19.7 million and consisted of a consolidated loss for the period of EUR6.4 million, adjusted for depreciation and amortization of EUR19.0 million, exclusion of finance cost of EUR30.9 million impacting the net income, offset by an increase in net working capital of EUR22.0 million primarily associated with receivables. Net working capital totaled EUR255.5 million at June 30, 2014.

Cash outflows from investing activities in the second quarter of 2014 amounted to EUR11.9 million and comprise expenditures for improvement in the United States and in Germany and maintenance projects in our remaining plants. We plan to finance our future capital expenditures with cash generated by our operating activities.

Cash outflows for financing activities comprised our interest payments of EUR29.3 million as well as a voluntary 10% redemption of original outstanding principal amount of Senior Secured Notes of EUR61.1 million. Our short term borrowings increased in second quarter 2014 by EUR38.2 million.

2014 Full Year Outlook

“We are pleased with our start through the first half of the year, with strong performance in both our Specialty Carbon Black and Rubber Carbon Black segments against our strategic plan. Thus far in 2014 we have seen positive volume growth across key regions, as we benefited from macroeconomic improvement in the United States and stabilization in the European economy. We expect positive growth in the second half of 2014, although recent Asian tire customer destocking and potential geopolitical risks within EMEA have the potential to impact our growth outlook. Our indexed pricing strategy based on energy pass-throughs will maintain our margins through the remainder of the year. Overall we remain well positioned to capture increasing global demand for our products with stable margins and are optimistic about the remainder of the year and beyond.

Consistent with this outlook, we expect full year Adjusted EBITDA to be between EUR200 million and EUR207 million and full year operating result (EBIT) to be between EUR99 million and EUR109 million.

Capital expenditures for the year are expected to be approximately EUR60 million. We expect cash conversion from EBITDA to continue to be strong.

As discussed during the IPO roadshow, we anticipate paying a dividend in 2015, for the full year 2014 equating to a dividend yield of 2% based upon the current share price in the range of $17.00 – $17.50. Other factors relevant for 2014 include:

  • 59.6 million shares outstanding
  • Underlying tax rate of 35% on pre-tax income
  • Proforma annualized cost of new financing of ~EUR35 million (including amortization of transaction costs)
  • Full Year 2014 Depreciation ~ EUR80 million

We look forward to continuing to execute against our strategic plan and updating you on our progress on future calls,” said Jack Clem, Chief Executive Officer.

Initial Public Offering

In July 2014, Orion completed the initial public offering of 19.5 million of its common shares at a price to the public of $18.00 per share. There are 59,635,126 common shares outstanding post IPO and at the date of this release. The common shares were sold by Kinove Luxembourg Holdings 1 S.`a r.l., the majority shareholder in the Company, and the Company did not receive any proceeds from the sale of common shares in the offering.

Refinancing

In August 2014, the Company completed the syndication process, including the final pricing of the interest rate spreads, for a EUR665 million term loan under its new credit agreement, which it entered into prior to the closing of its IPO in July. The term loan bears interest at an annual rate of LIBOR/EURIBOR (minimum 1.00%) plus 4.00%, subject to downward adjustment based on Orion’s leverage ratio as set forth in the credit agreement. As part of the refinancing implemented prior to the closing of the IPO, Orion drew down the term loan and used the proceeds to repay its existing indebtedness and related expenses. The credit agreement also provides for a EUR115 million revolving credit facility, bearing interest at an annual rate of LIBOR/EURIBOR plus 3.00%, subject to downward adjustment. With the completion of the syndication process the terms of the credit agreement are fixed.

The recent refinancing together with the recapitalization associated with the IPO provides Orion with greater flexibility in its operations as a public company and substantially reduces its overall interest expense. As a result, Orion’s estimated pro forma annualized interest expense (at an overall effective annual rate of 5.00%) has been reduced by approximately EUR50 million for the 12 months following the IPO (based on current LIBOR/EURIBOR rates), as compared with the 12 months prior to the IPO. This very significant reduction in interest cost will provide Orion with further liquidity that may be used for investment in its business as well as other corporate purposes.

Conference Call

As previously announced, Orion will hold a conference call tomorrow, Friday, September 5, 2014 at 8:30 a.m. (ET). The dial-in details for the live conference call are as follow:

U.S. Toll Free:

1-877-407-4018

International:

1-201-689-8471

U.K. Toll Free:

0 800 756 3429

Germany Toll Free:

0 800 182 0040

Luxembourg Toll Free:

800 28 522

Luxembourg Local:

352 2786 0689

A replay of the conference call may be accessed by phone at the following numbers through September 12, 2014:

U.S. Toll Free:

1-877-870-5176

International:

1-858-384-5517

Conference ID:

13589518

Additionally, a live and archived webcast of the conference call will be available on the Investor Relations section of the Company’s website at: www.orioncarbons.com.

To learn more about Orion, please visit the company’s Web site at www.orioncarbons.com. Orion uses its Web site as a channel of distribution for material Company information. Financial and other material information regarding Orion is routinely posted on the Company’s Web site and is readily accessible.

About Orion Engineered Carbons

Orion is a worldwide supplier of Carbon Black. The Company offers standard and high-performance products for coatings, printing inks, polymers, rubber and other applications. Our high-quality Gas Blacks, Furnace Blacks and Specialty Carbon Blacks tint, colorize and enhance the performance of plastics, paints and coatings, inks and toners, adhesives and sealants, tires, and manufactured rubber goods such as automotive belts and hoses. With 1,360 employees worldwide, Orion runs 14 global production sites and four Applied Technology Centers. For more information visit our website www.orioncarbons.com.

Forward Looking Statements

This document contains certain forward-looking statements with respect to our financial condition, results of operations and business, including those in the “2014 Outlook” section above. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among others, statements concerning the potential exposure to market risks, statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions and statements that are not limited to statements of historical or present facts or conditions. Some of these statements can be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “could,” “should,” “may,” “plan,” “project,” “predict” and similar expressions. Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include those factors detailed under the captions “Note Regarding Forward-Looking Statements” and “Risk Factors” in the Prospectus. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement – including the “2014 Outlook” section above – as a result of new information, future events or other information, other than as required by applicable law.

Non-IFRS Financial Measures Reconciliations

In this release we refer to Adjusted EBITDA and Contribution Margin which are financial measures that have not been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) or the accounting standards of any other jurisdiction and may not be comparable to other similarly titled measures of other companies. Adjusted EBITDA is defined as operating result (EBIT) before depreciation and amortization, adjusted for acquisition related expenses, restructuring expenses, consulting fees related to Group strategy, share of profit or loss of associates and certain other items. Adjusted EBITDA is used by our management to evaluate our operating performance and make decisions regarding allocation of capital because it excludes the effects of certain items that have less bearing on our underlying business performance. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Some of these limitations are: (a) although Adjusted EBITDA excludes the impact of depreciation and amortization, the assets being depreciated and amortized may have to be replaced in the future and thus the cost of replacing assets or acquiring new assets, which will affect our operating results over time, is not reflected; (b) Adjusted EBITDA does not reflect interest or certain other costs that we will continue to incur over time and will adversely affect our profit or loss, which is the ultimate measure of our financial performance and (c) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other IFRS-based financial performance measures, such as consolidated profit or loss for the period and our other IFRS financial results.

Contribution Margin is calculated by subtracting variable costs (raw materials, packaging, utilities and distribution costs) from our revenue. We believe that Contribution Margin and Contribution Margin per Metric Ton are useful since we see these measures as indicating the portion of revenue that is not consumed by variable costs (raw materials, packaging, utilities and distribution costs) and therefore contributes to the coverage of all other costs and profits.

We define Net Working Capital as the total of inventories and current trade receivables, less trade payables. Net Working Capital is a non-IFRS financial measure, and other companies may use a similarly titled financial measure that is calculated differently from the way we calculate Net Working Capital.

The following tables present a reconciliation of each of Adjusted EBITDA and Contribution Margin to the most directly comparable IFRS measure:

1 See below for a reconciliation of Adjusted EBITDA to profit and loss for the period.

Interim condensed consolidated statement of financial position

of Orion Engineered Carbons S.`a r.l.

as at June 30, 2014 – unaudited

Jun 30, 2014 Dec 31, 2013

ASSETS

In EUR k In EUR k
Non-current assets
Goodwill 48,512 48,512
Other intangible assets 117,239 125,501
Property, plant and equipment 330,438 333,454
Investment in joint ventures 4,608 4,608
Other financial assets 1,565 1,691
Other assets 3,265 4,119
Deferred tax assets 47,656 43,105
553,283 560,990
Current assets
Inventories 142,948 123,171
Trade receivables 227,991 197,623
Emission rights 1,977
Other financial assets 1,037 637
Other assets 40,544 40,151
Income tax receivables 12,020 11,938
Cash and cash equivalents 42,845 70,478
467,385 445,975
1,020,668 1,006,965
Jun 30, 2014 Dec 31, 2013

EQUITY AND LIABILITIES

In EUR k In EUR k
Equity
Subscribed capital 43,750 43,750
Reserves (108,427 ) (99,048 )
Profit or loss for the period (6,848 ) (18,953 )
(71,525 ) (74,251 )
Non-current liabilities
Pension provisions 37,057 35,943
Other provisions 14,695 15,014
Liabilities to shareholders 259,768 256,161
Financial liabilities 480,347 538,175
Other liabilities 1,938 1,368
Deferred tax liabilities 42,880 43,797
836,685 890,458
Current liabilities
Other provisions 32,884 44,268
Liabilities to banks 46,276 2,103
Trade payables 115,377 99,511
Other financial liabilities 15,279 15,828
Income tax liabilities 11,789 5,969
Other liabilities 33,903 23,079
255,508 190,758
1,020,668 1,006,965

Interim condensed consolidated income statements

of Orion Engineered Carbons S.`a r.l.

for the three and six months ended June 30, 2014 and 2013 – unaudited

Apr 1 to
Jun 30,
2014

Apr 1 to
Jun 30,
2013

Jan 1 to
Jun 30,
2014

Jan 1 to
Jun 30,
2013

In EUR k In EUR k In EUR k In EUR k
Revenue 341,283 350,589 671,756 691,710
Cost of sales (261,545 ) (275,080 ) (521,114 ) (546,586 )
Gross profit 79,738 75,509 150,642 145,124
Selling expenses (26,014 ) (23,964 ) (50,395 ) (47,690 )
Research and development costs (3,232 ) (1,954 ) (6,058 ) (5,363 )
General and administrative expenses (13,484 ) (12,033 ) (25,792 ) (25,503 )
Other operating income 1,789 4,748 2,482 9,851
Other operating expenses (11,980 ) (13,222 ) (15,595 ) (22,324 )
Operating result (EBIT) 26,817 29,084 55,284 54,095
Finance income 2,558 7,071 2,999 8,655
Finance costs (30,893 ) (29,111 ) (55,126 ) (64,686 )
Share of profit or loss of joint ventures 82 14 165 98
Financial result (28,253 ) (22,026 ) (51,962 ) (55,933 )
Profit or loss before income taxes (1,436 ) 7,058 3,323 (1,838 )
Income taxes (5,010 ) (8,038 ) (10,171 ) (5,632 )
Profit or loss for the period (6,446 ) (980 ) (6,848 ) (7,470 )
Net Earnings per Share (EUR per share)* (0.15 ) (0.02 ) (0.16 ) (0.17 )

* Based on 43,750,000 actual shares as of June 30, 2014.

Interim condensed consolidated statements of cash flows

of Orion Engineered Carbons S.`a r.l.

for the six months ended June 30, 2014 and 2013 – unaudited

Jan 1 to
Jun 30,
2014

Jan 1 to
Jun 30,
2013

In EUR k In EUR k
Profit or loss for the period (6,848 ) (7,470 )
Income taxes (10,171 ) (5,632 )
Profit or loss before income taxes 3,323 (1,838 )
Depreciation and amortization of intangible assets and property, plant and equipment 37,884 28,639
Other non-cash expenses/income 2,712 3,830
Increase/decrease in trade receivables (26,005 ) (22,500 )
Increase/decrease in inventories (18,341 ) 12,801
Increase/decrease in trade payables 14,645 25,491
Increase/decrease in provisions (11,498 ) (4,488 )
Increase/decrease in other assets and liabilities that cannot be allocated to investing or financing activities 9,412 (8,697 )
Finance income (2,999 ) (8,656 )
Finance costs 55,126 64,686
Cash paid for income taxes (10,375 ) (16,203 )
Cash flows from operating activities 53,884 73,065
Cash paid for the acquisition of intangible assets and property, plant and equipment (19,568 ) (38,472 )
Cash flows from investing activities (19,568 ) (38,472 )
Cash received from borrowings, net of transaction costs 43,965 8,469
Repayments of borrowings (61,064 )
Interest paid (45,416 ) (71,664 )
Interest received 196
Cash flows from financing activities (62,319 ) (63,195 )
Change in cash (28,003 ) (28,602 )
Change in cash resulting from exchange rate differences 370 (1,838 )
Cash and cash equivalents at the beginning of the period 70,478 74,862
Cash and cash equivalents at the end of the period 42,845 44,422
Composition of cash and cash equivalents
Bank balances and petty cash 42,845 44,422

Reconciliation of Adjusted EBITDA to Profit (Loss) for the Period

of Orion Engineered Carbons S.`a r.l.

for the three and six months ended June 30, 2014 and 2013 – unaudited

Reconciliation of profit or loss In EUR k

For the three months
ended Jun 30,

For the six months
ended Jun 30,

2014 2013 2014 2013
Adjusted EBITDA 55,954 51,693 105,969 96,963
Share of profit of joint venture (82 ) (14 ) (165 ) (98 )
Restructuring expenses (1) (718 ) (4,346 ) (1,321 ) (5,475 )
Consulting fees related to Group strategy (2) (3,927 ) (3,419 ) (5,853 ) (5,686 )
Expenses related to capitalized emission rights (905 ) (2,559 )
Other non-operating (3) (5,461 ) (242 ) (5,461 ) (411 )
EBITDA 45,766 42,767 93,169 82,734
Depreciation, amortization and impairment of intangible assets and property, plant and equipment (18,949 ) (13,683 ) (37,884 ) (28,639 )
Earnings before taxes and finance income/costs (operating result (EBIT)) 26,817 29,084 55,285 54,095
Other finance income 2,558 7,071 2,999 8,655
Share of profit of joint ventures 82 14 165 98
Finance costs (30,893 ) (29,111 ) (55,126 ) (64,686 )
Income taxes (5,010 ) (8,038 ) (10,171 ) (5,632 )
Profit or loss for the period (6,446 ) (980 ) (6,848 ) (7,470 )
(1) Restructuring expenses include personnel-related costs and IT-related costs in particular in connection with the roll out of our global SAP platform.
(2) Consulting fees related to the Group strategy include external consulting fees from establishing and implementing our operating, tax and organizational strategies.
(3) Other non-operating includes an accrual of EUR 5,0 million for IPO-related costs.

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