Orion Engineered Carbons SA Stock

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It is now my pleasure to introduce Mr. Chris Kapsch, Vice President of Investor Relations. Please go ahead.

Thank you, Stacy. Good morning, everyone. This is Chris Kapsch, VP of Investor Relations at Orion, and welcome to our second quarter 2026 earnings conference call. Joining the call are Corning Painter, Orion's Chief Executive Officer; and Jon Puckett, our Chief Financial Officer. We issued our second quarter results after the markets closed yesterday. We have posted a slide presentation to the Investor Relations section 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, August 6, 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 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. With that, I will turn the call over to Corning.

Good morning, and thank you all for joining us. On the call today, I'll start with a few highlights regarding our strong second quarter results. The Orion team executed extremely well in an extraordinary time, and we remain keenly focused on the things that we control. Then I'll discuss bigger picture trends in our business that supported our quarterly results as well as some trade flow and regulatory considerations that we view as favorable looking forward. After that, I'll turn the call over to Jon Puckett for a more detailed review of our results before sharing some brief concluding remarks and shifting to Q&A. On Slide 3, Orion's adjusted EBITDA improved 26% sequentially to $58 million in the second quarter.

We're particularly pleased with the results in our Specialty segment, where responsiveness to demand strength, coupled with prompt pricing actions contributing to what is our best quarterly segment performance since early 2020 -- 2 metrics exemplify this business' attractiveness as well as its much greater potential. Robust volume gains were geographically broad-based and across end markets. Timely targeted pricing actions also helped preserve the segment's profit, mitigating extreme feedstock cost volatility. Specialty's excellent results, coupled with our Rubber segment's steady performance enable us to reaffirm our full year adjusted EBITDA guidance range despite today's macro uncertainty and limited order visibility into the second half.

We are lifting our free cash flow expectations for the full year, primarily thanks to tangible progress in working capital initiatives. We now expect to generate slightly positive free cash flow in 2026 at the midpoint of our guidance range despite still operating in trough conditions. On Slide 4, we highlight our stepped-up execution and intense focus on the factors we can control. As ingrained in Orion's culture, we always emphasize safety first, and our year-to-date safety performance has been exceptional with only one injury across all our people, sites and contractors, substantially better than chemical industry norms.

I would like to thank the whole Orion team, but particularly those who work at our production sites for your commitment to safety. These results reflect a high degree of operating discipline. Let's keep it up. We are also encouraged by our continued progress on plant reliability. Supported by operational excellence programs, combined with prioritizing our maintenance CapEx on the most impactful projects, we are tracking towards our third consecutive year of improved plant reliability. In recent years, we have also worked to diversify our raw material supply options and production recipes, and this is -- flexibility.

Our working capital initiatives are yielding measurable benefits. Structurally lower inventories enabled partly by progress in reliability and better forecast accuracy, along with improved payment terms have been the most impactful levers. Meanwhile, cost initiatives, including head count, procurement and efficiency programs are delivering, and we remain on track for an annualized gross benefit of $20 million. On Slide 5, we discuss recent trends. Overall, our business continues to exhibit resilience despite oil price volatility and considerable global uncertainty. Underpinning demand strength during Q2 was customer preference for more derisked local supply chains.

This favors our business model and footprint. A bit more color on the Specialty segment's performance here. In our Western regions, the recent top line strength reflects broad end market participation beyond restocking activity. Demand for products serving coatings as well as wire and cable markets such as infrastructure were particularly healthy. Moreover, our customers continue to express how their demand for our products reflects genuine orders from their customers. Pricing actions, meanwhile, have been effective in helping to protect profit. For our rubber business, tire-related demand in key geographic regions has been generally stable, but local tire production rates remain below historical norms.

Despite that, the North American spot market was strong in the quarter and exceeded our capacity to accept incremental orders in some instances. We believe our Rubber segment is set up for recovery based on several underlying trends like trade issues, the value of local-for-local business and some apparent tightness in local supply and demand. As import levels and channel inventories continue to normalize, locally made tire sell-in should improve, foreshadowing higher local tire production rates, a positive for Orion. On Slide 6, we highlight several favorable trade flow and regulatory considerations, which we expect will also contribute to improving fundamentals.

Early last month, the European Commission finalized antidumping duties on tire exports from China ranging from 24% to 45% on all but one exporter. And the EU's parallel anti-subsidization investigation into Chinese passenger car tires remains ongoing. Moreover, there is a precedent for the European Commission to impose anti-circumvention measures should evidence emerge that there are efforts to bypass import duties.

Given the Chinese imports into the EU dropped 75% from peak earlier this year when the antidumping duties were originally expected, this final action should reduce Chinese imports and support local EU tire production. Meanwhile, U.S. tire imports have been down versus prior year levels in each of the past 4 months. We continue to witness reshoring commitments, including at least 3 additional global players announcing their intent for a significant capital investment in North America tire production facilities. We believe recently announced closures of old higher-cost plants need to be considered against the context of tire manufacturers, modernizing, expanding and scaling their best production facilities.

On balance, this is healthy for the industry. Meanwhile, we expect a variety of secular tire and technology trends will contribute to steady and improving carbon black consumption. These include the preference for larger tires, greater wear associated with EV adoption, the shift to all-season tires and increasing standards around abrasion and durability in Europe. The confluence of these trends should translate into either higher carbon black content per unit or more frequent replacement cycles or both [Audio Gap]

Ladies and gentleman, please stand by.

The adoption and the shift to all-season tires and increasing standards around abrasion and durability in Europe. The confluence of these trends should translate into either higher carbon black content per unit or more frequent tire replacement or both, supporting our industry's fundamentals. All considered, there are multiple of reasons to believe our Rubber segment's footprint will remain essential, particularly given the absence of new Western carbon black production facilities. These dynamics underscore the durable nature of our business and our local-for-local value proposition. Jon, over to you.

Thank you, Corning. Slide 7 covers our second quarter results at a high level. Adjusted EBITDA was $58 million, down 15% versus the prior year, primarily due to lower Rubber segment annual pricing agreements. Despite 5% higher year-over-year specialty volumes. Adjusted EBITDA improved 26% sequentially, with pricing actions in response to oil price volatility and improved product mix contributing favorably. Specialty was the star performer in our second quarter with adjusted EBITDA of $39 million, increasing 96% compared to the prior year period. The 5% year-over-year volume increase in specialty included nearly 10% growth in EMEA and the Americas. Increased earnings were also driven by pricing actions and favorable mix.

Rubber segment adjusted EBITDA of $19 million was 61% lower year-over-year but was consistent on a sequential basis. As mentioned, the 2026 contractual price agreements were the main driver of the year-over-year decline. Also contributing were customer mix and the absorption impact as we reduced inventory levels and improved cash flow. We're really proud of generating positive free cash flow during the quarter, especially given the surge in oil-derived feedstock costs. Our working capital initiatives, particularly in inventory and accounts payable contributed to our success and generated $4 million of cash in the second quarter.

CapEx declined $11 million from the first quarter, also contributing to the $2 million of free cash flow. On Slide 8, we get more granular on specialty quarterly adjusted EBITDA, which was the highest in 4 years. The near doubling of adjusted EBITDA was driven by 5% higher volumes, nimble and proactive pricing actions and favorable product mix. Demand strength in specialty was broad-based and across almost every key end market we serve. Sales into the general polymer end market were healthy. For example, engineered plastics growth was mid-single digit. Outside the general polymer space, we achieved double-digit gains with our higher-value solutions into coatings, wire and cable, packaging and battery markets. Our success in coatings was particularly notable given the recent softness in global OEM build rates. Above-market growth reflects demand for our best-in-class products supported by our recent expansion projects.

Beyond automotive OE, sales of our coating solutions into marine, protective and industrial markets all performed well. Double-digit growth in wire and cable reflects the success of our newer conductive grades, supporting underlying energy and infrastructure market expansion. Slide 9 summarizes our Q2 Rubber segment results. Adjusted EBITDA declined sharply year-over-year as expected, but was consistent on a sequential basis. Lower 2026 contractual pricing, unfavorable customer mix and an absorption impact associated with internal inventory actions that were intentional were the primary contributors to the lower year-on-year performance.

Tire production rates remain below historical norms in our key regions. However, tire sell-through rates are above build rates, and imported tires are trending lower. So we expect channel inventories will decline and support local tire manufacturing. One interesting note for the quarter, despite the overall year-on-year volume decline, there were signs of tightness in the North American carbon black market as we saw strong spot demand during the quarter in rubber. Spot market strength was such that we could not satisfy all the requests from our customers. And to be clear, consistent with our closing of several reactor lines last year, it is not our intent to hold capacity to back up competitors, domestic or otherwise.

Let's move to Slide 10. Thanks largely to tangible progress from ongoing initiatives, working capital was a $4 million source of cash in the second quarter despite oil being up about 29% on average from Q1 to Q2. Let me put this into perspective. Based on our sensitivities, unmitigated, this increase in average oil-based feedstocks would have been a headwind of about $60 million in the second quarter. However, our actions around reducing inventory levels and increasing vendor payment terms more than offset this working capital headwind. This is a meaningful accomplishment that the whole team at Orion contributed to. Corning and I congratulate them on the outcome of their efforts. We will continue to take actions like these to drive free cash flow.

Cash flow from operations was $27 million, and CapEx declined $11 million sequentially to $25 million, resulting in free cash flow of $2 million in Q2. Net debt at quarter end was $961 million, down modestly from Q1 levels with a net debt to adjusted EBITDA ratio of 4.4x, comfortably below our credit agreement leverage ratios. And finally, we ended the quarter with liquidity of $178 million. With that, I'll hand the call back to Corning.

Thanks, Jon. Slide 11 provides a revised outlook and sensitivity. Despite continuing global turmoil, we're reaffirming our full year adjusted EBITDA guidance of $170 million to $210 million which we raised last quarter. This guidance reflects our typical seasonality. Beyond that, we're lifting our free cash flow outlook range, which is now $5 million of free cash flow at the midpoint. This assumes crude oil prices averaging $80 per barrel in the second half of 2026, in line with recent industry forecasts. The $43 million full year improvement in free cash flow is a function of the progress we have made with working capital levers, which helped diminish the headwind associated with higher oil-driven feedstock costs.

Our rule of thumb sensitivities are on the right side of the slide and have been performing as expected even in these testing times. Let me conclude with a few thoughts on Slide 12. The operating backdrop remains volatile, but it also creates opportunity for Orion to be entrepreneurial, to find and close on new opportunities and to demonstrate the resilience and durable nature of our business.

Local for local is a smart, low-risk sourcing strategy and our commercial strategy is to build enduring partnerships with growth-minded customers that value our footprint, proximity, reliability and dependability. At the same time, our organizational mindset is laser-focused on performance metrics that drive value, including continuous improvement in reliability and especially in earnings and free cash flow. We believe the actions we are taking today position Orion regardless of how the macro and geopolitical backdrops evolve. With that, Stacy, let's open up the call for Q&A.

[Operator Instructions] Your first question comes from Josh Spector with UBS.

It's Chris Perrella on for Josh. Can you just -- where are you guys in the contract negotiation process? And what are the puts and takes there driving that? And then I have a follow-up on specialty.

Sure. So the negotiations have started off with some customers, I'd say, typical pattern in terms of sequencing of who's in, who's not. There's a limit to what I can say because it's competitively set up, competitively sensitive what goes on. But I'd say the setup this year is a little bit better in terms of the imports, the regulatory actions, the tightness we saw in spot that kind of thing. And I'd say the other thing is customers have experienced this year the value of reliability.

I appreciate that. And on specialty, with demand, is there a headwind in the third quarter from higher raw material costs? What -- could you discuss more sort of the outlook for specialty in the third quarter, please?

Sure. I mean, seasonally, we typically see specialty a little bit weaker in the third quarter. Europe is an important business for us. So we have some seasonal impacts there with the holiday season in that time frame. We don't have huge visibility, Chris, to like customer forecasts very far out, you get them, but there isn't a lot of confidence in them, I'd say. But yes, I don't think there's anything like super changing in the outlook from our customers at this point.

Next question [indiscernible] with Mizuho.

So it was a nice uplift in gross profit per ton in specialties. How much of that improvement will you be able to hold into Q3? Like is the mix improvement going to continue in Q3 as well?

Sure. So the biggest factors for us there were really volume and mix. So on those areas, like it really depends then, okay, exactly there's always some ups and downs in one quarter to another. And again, there isn't a lot of visibility around that. There's probably some gain we got on timing and pricing and so forth, which I wouldn't expect to continue. But we don't really have -- in the third quarter, let me say September is almost always like the biggest month, and it's just hard to speak with great certainty on how that's going to play out right now. But you have our guidance.

Got it. And then are you going to continue the favorable payment terms into the next 2 quarters as well?

I think we're holding on to those terms like that's a value that we created in this time frame, and I see us holding on to that just going forward period. That's how we emerge from this stronger than before.

[Operator Instructions]

Stacy, let's go ahead and wrap up. So let me say to everyone, I appreciate everybody's time and your interest in Orion. I'm sorry, we do have another question come in. Let's go ahead and take that.

John Roberts with Mizuho.

Just a couple of quick follow-ups here. You're assuming $80 a barrel Brent average in the second half of '26, would you say your specialty black pricing is consistent with that level of oil?

Yes. Keep in mind that we have some formula pricing in specialty. And of course, there's a certain lag in how that works through our P&L. And -- but the majority of it is more or less open pricing. So when we've done our pricing actions on it, some of it was surcharge and reflected that, but there's also a fair amount of base pricing that we went in with, which we would expect to maintain through this. So I think on the formula part, that's really looked to try to basically just be neutral in the overall performance. And that's how we kind of stress that in our script. Again, the big drivers for us was more volume and mix in the quarter.

And then would you say the feedstock market for carbon black relative to other petroleum liquids is generally more tight or less tight, like jet fuel and diesel seem to be the tightest. Is carbon black oil at the other end of the spectrum? Or how would you characterize it?

But the good thing about our industry and the flexibility efforts we've made on different kind of sourcing, storage containment, supply chains and all that, is just to have greater flexibility across all of them. So we do sometimes use a middle distillate, which would be impacted by those kind of areas, but we're able to try to move things around to mitigate those costs. By and large, though, we have not had to interrupt and we don't see ourselves interrupting our production based on CBO supply issues.

We have a follow-up from Josh Spector with UBS.

It's Chris on again. Just a question on EU emissions credits. Can you talk about the timing and impact on the P&L and the cash flow in the second half of the year?

Right? So it's a great question, Chris. This timing has moved several times. We now believe that we will be coming out in the third quarter. You'll see there's been a lot of energy in Europe about what adjustments and so forth, they would make to that. Our best estimate on that is included in our current guidance.

I would like to turn the floor over to Corning for closing remarks.

Okay. So thank you all for being with us today. Thank you, Stacy, for helping us through the little glitch we had here. We appreciate your time. We look forward to engaging with many of you next week at the Mizuho Industrials and Chemicals Conference as well as the UBS and Jefferies investor conferences following Labor Day. So we'll be out and about and look forward to meeting with as many of you as possible. Thanks very much, and have a good rest of your day.

This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.

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.