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Orion Engineered Carbons S.A. Announces Third 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 third quarter of 2014.

“I am pleased with our third quarter results. We are successfully executing our strategy, growing Specialty Black volumes and improving Rubber Black EBITDA margins. This drove solid Adjusted EBITDA growth of 5.1% over the prior year and generated substantial cash from operations of over EUR58M,” said Jack Clem, Orion’s Chief Executive Officer.

In EUR Fiscal Year 2014 Fiscal Year 2013
Third Quarter First Nine Months Third Quarter First Nine Months
Revenue 329.8m 1,001.6m 336.1m 1,027.8m
Volume (in kmt) 246.4 751.6 244.9 738.1
Contribution Margin 106.1m 316.2m 100.3m 302.3m
Contribution Margin per metric ton 431 421 410 410
Operating Result (EBIT) 27.5m 82.8m 27.8m 81.9
Adjusted EBITDA 53.2m 159.2m 50.6m 147.6m
Profit or loss for the period (40.8m) (47.6m) 5.5m (2.0m)
Pro forma profit or loss for the period(1)(3) N/A 14.9m N/A N/A
EPS (2) (0.68) (0.80) 0.09 (0.03)
Pro forma EPS(2) N/A 0.25 N/A N/A

Notes:

(1) Pro forma profit or loss for end of Q3 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”) except that the pro forma for the first nine months reflects a final interest rate of 5% per annum on the refinanced debt (assumed 4.5% per annum in the Prospectus), and a final number of outstanding shares of 59.6 million (assumed in the Prospectus 58.9 million shares).

(2) EPS and Pro forma EPS calculated using profit or loss for the period and based upon actual number of shares outstanding of 59,635,126 as of September 30, 2014.

(3) Pro forma profit for the nine months period ended September 30, 2014 includes adjustment items of EUR19.0 million to EBITDA, consisting of consulting fees (EUR3.9 million), restructuring expenses (EUR3.0 million) and other non-operating expenses (EUR12.1 million) mainly related to IPO expenses and reconciling the difference between EBITDA and adjusted EBITDA. Pro forma profit for the nine month period ended September 30, 2014 based upon Adjusted EBITDA (i.e., after adjusting for IPO related costs, consulting fees and restructuring expenses on an after tax basis using an underlying group tax rate of 35%) totaled EUR0.46 per share.

Third Quarter 2014 Overview

An increase of 1.5 kmt resulted in a volume of 246.4 kmt in the third quarter of 2014 as compared to 244.9 kmt in the third quarter of 2013. This performance reflected increased volumes in both the Specialty and Rubber Carbon Black segments driven by Europe and the Americas, offset by some weaker demand of Specialty Carbon Black in Korea and Rubber Carbon Black in South America.

While volumes in the quarter rose, revenue decreased by EUR6.2 million, or 1.9%, to EUR329.8 million in the third quarter of 2014 from EUR336.1 million in the third quarter of 2013 primarily due to targeted individual product mix effects within our two segments, as well as the pass through effect of declining oil prices. Contribution margin increased by EUR5.8 million, or 5.8%, to EUR106.1 million in the third quarter of 2014 from EUR100.3 million in the third quarter of 2013, driven primarily by Specialty Carbon Black sales in Europe, Korea and the Americas, as well as Rubber Carbon Black sales in Korea and the Americas, partially offset by Europe.

Adjusted EBITDA increased by 5.1% to EUR53.2 million in the third quarter of 2014 from EUR50.6 million in the third quarter of 2013, reflecting the impact of the increased contribution margin and continued focus on cost control.

The positive development of our contribution margin and adjusted EBITDA in a period of declining oil prices reflects the effectiveness of our oil price change pass through contract mechanism.

First Nine Months 2014 Overview

An increase of 13.5 kmt resulted in a total volume of 751.6 kmt in the first nine months of 2014 as compared to 738.1 kmt in the first nine months of 2013. This performance was driven by growth in the Specialty Carbon Black segment particularly in the Americas as well as Europe. Sales volumes in our Rubber Carbon Black segment increased in the Americas and in South Korea, but were weaker in South Africa, Europe and South America.

While volumes grew by 1.8%, revenue decreased by EUR26.2 million, or 2.5%, to EUR1,001.6 million in the first nine months of 2014 from EUR1,027.8 million in the first nine months of 2013 mainly due to foreign exchange rate impacts, as well as targeted individual product mix impacts in both segments.

Contribution margin increased by EUR14.0 million, or 4.6%, to EUR316.2 million in the first nine months of 2014 from EUR302.3 million in the first nine months of 2013, mainly due to the favorable impact of the higher sales volume in the Specialty Carbon Black segment especially in Europe, as well as overall contribution margin development in the Rubber Carbon Black segment.

Adjusted EBITDA increased by EUR11.6 million, or 7.9% to EUR159.2 million in the first nine months of 2014 from EUR147.6 million in the first nine months of 2013 as a result of the increase of contribution margin, our continued focus on cost control, offset in part by our investment in Specialty sales resources.

Quarterly Segment Results

Specialty Carbon Black

Volumes for the Specialty Carbon Black segment increased by 1.3 kmt, or 2.6%, to 51.0 kmt in the third quarter of 2014 from 49.7 kmt in the third quarter of 2013, reflecting increased demand in Europe and the Americas offset by some weaker demand in Korea.

Revenue of the segment also increased by EUR0.8 million, or 0.8%, to EUR101.0 million in the third quarter of 2014 from EUR100.2 million in the third quarter of 2013, as a result of increased sales volume offset by some targeted changes in the mix of products sold.

Gross profit of the segment increased by EUR0.8 million, or 2.5%, to EUR34.0 million in the third quarter of 2014 from EUR33.2 million in the third 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 segment remained stable at EUR26.9 million in the third quarter of 2014 versus EUR27.0 million in the third quarter of 2013 reflecting gross profit development counterbalanced by investments in technical sales and application support resources. Adjusted EBITDA margin was 26.6% as compared to 26.9% in the third quarter of 2013, consistent with our strategy of developing volume growth while maintaining stable margins

Rubber Carbon Black

Sales volume of the Rubber Carbon Black segment increased slightly to 195.4 kmt in the third quarter of 2014 from 195.2 kmt in the third quarter of 2013, reflecting increased demand in Europe, North America, and Korea, which was offset by weaker demand in Brazil and South Africa.

Revenue of the segment decreased by EUR7.1 million, or 3.0%, to EUR228.8 million in the third quarter of 2014 from EUR235.9 million in the third quarter of 2013 due to decreased selling price primarily associated with the pass-through of lower oil feedstock prices, as well as some targeted mix effects.

Gross profit of the segment increased by EUR7.7 million, or 21.6%, to EUR43.3 million in the third quarter of 2014 from EUR35.6 million in the third quarter of 2013 with an increase in depreciation and amortization associated with additional capital investment expenditures, offset by the pass though effect of declining oil prices, as well as fixed cost savings from the closure of our Portuguese plant.

As a result, adjusted EBITDA of the segment increased by EUR2.7 million, or 11.3% to EUR26.3 million in the third quarter of 2014, from EUR23.7 million in the third quarter of 2013, reflecting the development of gross profit offset by some additional administration charges and other items. Adjusted EBITDA margin rose to 11.5% in the third quarter of 2014 from 10.0% in the third quarter of 2013.

Balance Sheet and Cash Flow

As of September 30, 2014, the Company had cash and cash equivalents of EUR83.9 million.

The Company’s non-current gross indebtedness as of September 30, 2014 was EUR664.8 million, comprised of our new term loan liabilities net of EUR19.0 million transaction costs. Current liabilities to banks as of September 30, 2014 totaled EUR9.6 million. Net indebtedness was EUR609.3 million.

Cash inflows from operating activities in the third quarter of 2014 amounted to EUR58.3million, consisting of a consolidated loss for the period of EUR40.8 million, adjusted for depreciation and amortization of EUR19.2 million, exclusion of finance cost of EUR67.8 million impacting net income, and a decrease in net working capital of EUR20.4 million primarily associated with receivables that reflect the beneficial impact of declining oil prices. Net working capital totaled EUR242.7 million at September 30, 2014, compared to EUR255.5 million as at June 30, 2014.

Cash outflows from investing activities in the third quarter of 2014 amounted to EUR17.6 million and comprise expenditures for improvements in the manufacturing network and maintenance projects throughout the production system. We plan to continue financing our future capital expenditures with cash generated by our operating activities.

Cash outflows for financing activities in the third quarter amounted to EUR(1.2) million, comprised primarily of our repayment of borrowings in the amount of EUR(559.6) million, cash received from new term loan financing (net of transaction costs) of EUR645.7 million, interest payments and early redemption fees of EUR(66.2) million as well income received of EUR15.4 million mainly associated with the hedge of our US dollar denominated indebtedness. Our short term borrowings decreased in third quarter 2014 by EUR36.7 million.

2014 Full Year Outlook

“As we move into the final quarter of the year, we are experiencing stable trends in our primary geographies. Although the European economy has yet to recover and South America remains weak, the level of demand remains consistent with our prior expectations. Asia Pacific and the US have also performed in line with our prior outlook. Overall we remain well positioned to capture increasing global demand for our products, and are optimistic about the remainder of the year.

“Consistent with this outlook, we reaffirm our outlook and expect full year Adjusted EBITDA to be between EUR200 million and EUR207 million for 2014.

Dividend Policy

“We continue to expect strong free cash flow generation for the year and subject to Board approval, we intend to pay a full year dividend of EUR40 million in the fourth quarter of 2014, (equating to an estimated EUR0.67 per share). Starting in 2015, we intend to pay quarterly dividends of some EUR10 million per quarter,” said Jack Clem, Chief Executive Officer. No dividend record date has yet been set.

Other factors relevant for 2014 include:

  • 59.6 million shares outstanding
  • Underlying tax rate of 35% on pre-tax income
  • Pro forma annualized cost of new financing of ~EUR35 million (including amortization of transaction costs)
  • Capital Expenditures of ~EUR58 million
  • Full Year 2014 Depreciation and Amortization ~ EUR77 million

In order to improve our group effective tax rate, we are now able to realign our internal financing arrangements. We intend to reflect a one-time, non-cash accounting entry of EUR10 million in the quarter ending December 31, 2014. A portion of equity reserves are to be reclassified through financial expense. This adjustment will have no net impact on total equity.

Conference Call

As previously announced, Orion will hold a conference call tomorrow, Friday, November 14, 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 November 21, 2014:

U.S. Toll Free: 1-877-870-5176
International: 1-858-384-5517
Conference ID: 13593535

Additionally, an 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.

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:

Interim condensed consolidated statement of financial position of
Orion Engineered Carbons S.A.
as at September 30, 2014 – unaudited
Sep 30, 2014 Dec 31, 2013

A S S E T S

In EUR k In EUR k
Non-current assets
Goodwill 48,512 48,512
Other intangible assets 114,817 125,501
Property, plant and equipment 343,578 333,454
Investment in joint ventures 4,483 4,608
Other financial assets 7,678 1,691
Other assets 2,675 4,119
Deferred tax assets 51,326 43,105
573,068 560,990
Current assets
Inventories 142,747 123,171
Trade receivables 222,707 197,623
Emission rights 1,977
Other financial assets 4,349 637
Other assets 37,085 40,151
Income tax receivables 11,755 11,938
Cash and cash equivalents 83,911 70,478
502,554 445,975
1,075,622 1,006,965
Sep 30, 2014 Dec 31, 2013

E Q U I T Y A N D L I A B I L I T I E S

In EUR k In EUR k
Equity
Subscribed capital 59,635 43,750
Reserves 81,279 (99,048 )
Profit or loss for the period (47,629 ) (18,953 )
93,285 (74,251 )
Non-current liabilities
Pension provisions 42,221 35,943
Other provisions 14,714 15,014
Liabilities to shareholders 256,161
Financial liabilities 664,733 538,175
Other liabilities 2,080 1,368
Deferred tax liabilities 45,695 43,797
769,443 890,458
Current liabilities
Other provisions 40,104 44,268
Liabilities to banks 9,577 2,103
Trade payables 122,691 99,511
Other financial liabilities 6,763 15,828
Income tax liabilities 13,030 5,969
Other liabilities 20,730 23,079
212,895 190,758
1,075,622 1,006,965
Interim condensed consolidated income statements
of Orion Engineered Carbons S.A.
for the nine months ended September 30, 2014 and 2013 – unaudited
July 1 to Sep 30, 2014 July 1 to Sep 30, 2013 Jan 1 to Sep 30, 2014 Jan 1 to Sep 30, 2013
In EUR k In EUR k In EUR k In EUR k
Revenue 329,808 336,054 1,001,565 1,027,764
Cost of sales (252,466 ) (267,244 ) (773,581 ) (813,830 )
Gross profit 77,342 68,810 227,984 213,934
Selling expenses (23,790 ) (21,709 ) (74,185 ) (69,399 )
Research and development costs (3,280 ) (2,347 ) (9,338 ) (7,710 )
General and administrative expenses (14,114 ) (12,261 ) (39,906 ) (37,764 )
Other operating income 438 1,784 2,921 7,409
Other operating expenses (9,112 ) (6,449 ) (24,707 ) (24,548 )
Operating result (EBIT) 27,484 27,827 82,769 81,922
Finance income 24,592 8,532 27,591 255
Finance costs (92,396 ) (26,450 ) (147,522 ) (74,204 )
Share of profit or loss of joint ventures 180 84 345 182
Financial result (67,624 ) (17,834 ) (119,586 ) (73,767 )
Profit or loss before income taxes (40,140 ) 9,993 (36,817 ) 8,155
Income taxes (641 ) (4,522 ) (10,812 ) (10,154 )
Profit or loss for the period (40,781 ) 5,471 (47,629 ) (1,999 )
Earnings per Share (EUR per share)*, basic (0.68 ) 0.09 (0.80 ) (0.03 )
Earnings per Share (EUR per share)*, diluted (0.68 ) 0.09 (0.80 ) (0.03 )

* Based on 59,635,126 actual shares as of September 30, 2014.

Adjusted EBITDA is reconciled to profit or loss as follows:

Reconciliation of profit or loss In EUR k
For the three months
ended Sep 30,
For the nine months
ended Sep 30,
2014 2013 2014 2013
Adjusted EBITDA 53,232 50,631 159,201 147,594
Share of profit of joint venture (180) (84) (345) (182)
Restructuring expenses (1) (860) (2,172) (3,007) (7,647)
Consulting fees related to Group strategy (2) (1,686) (2,537) (3,864) (8,223)
Expenses related to capitalized emission rights (147) (2,706)
Other non-operating (3) (3,833) (257) (12,144) (668)
EBITDA 46,673 45,434 139,841 128,168
Depreciation, amortization and impairment of intangible assets and property, plant and equipment (19,189) (17,608) (57,073) (46,247)
Earnings before taxes and finance income/costs (operating result (EBIT)) 27,484 27,827 82,769 81,922
Other finance income 24,592 8,532 27,591 255
Share of profit of joint ventures 180 84 345 182
Finance costs (92,396) (26,450) (147,522) (74,204)
Income taxes (641) (4,522) (10,812) (10,154)
Profit or loss for the period (40,781) 5,471 (47,629) (1,999)

(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 expenses in 2014 include now in particular all IPO related costs.

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