Orion Engineered Carbons' (OEC) CEO Jack Clem on Q2 2016 Results - Earnings Call Transcript

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Orion Engineered Carbons (NYSE:OEC)

Q2 2016 Results Earnings Conference Call

August 05, 2016, 08:30 AM ET

Executives

Diana Downey - Vice President, Finance and Investor Relations

Jack Clem - Chief Executive Officer

Charles Herlinger - Chief Financial Officer

Analysts

Ivan Marcuse - KeyBanc Capital Markets

Kevin Hocevar - Northcoast Research

Charlie Webb - Morgan Stanley

Operator

Greetings and welcome to the Orion Engineered Carbons Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Diana Downey, Vice President of Finance and Investor Relations for Orion. Thank you. You may begin.

Diana Downey

Thank you, operator. Good morning, everyone and welcome to Orion Engineered Carbons conference call to discuss second first quarter 2016 financial results. I'm Diana Downey, Vice President, Finance and Investor Relations. With me today are Jack Clem, Chief Executive Officer; and Charles Herlinger, Chief Financial Officer.

We issued our earnings press release after the market close yesterday and have posted an accompanying slide presentation to the investor relations portion of our website at orioncarbons.com. We will be referencing these slides during this call.

Before we begin, I would like to remind you that some of the comments made on today's call, including our financial guidance, are forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's filings with the SEC. Actual results may differ materially from those described during the call.

In addition, all forward-looking statements are made as of today, August 05, 2016, and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Also, non-IFRS financial measures discussed during this call are reconciled to the most directly comparable IFRS measures in the table attached to our press release.

I will now turn the call over to Jack Clem. Jack?

Jack Clem

Thank you, Diana. Good morning and thank you for joining us today for our second quarter 2016 earnings conference call. Our agenda for today is shown on Slide 3. I will be providing highlights for the second quarter of this year and comments on the performance of our two Carbon Black businesses. I will then turn the call over to our Chief Financial Officer, Charles Herlinger, who will provide more details on our financial results and discuss our outlook for 2016.

After Charles is finished, I will return to make a few comments on our outlook and priorities for the rest of the year and then we will open the lines to take your questions.

Referring to Slide 4, we delivered record profitability for the quarter in spite of some turbulence in the markets and the headwind we faced in this low oil price environment. We grew volumes in both businesses at stronger than market rates. Excluding the recent acquisition in China, our organic growth outpaced our view of the market growth rates with especially stronger than anticipated demand in Europe.

Cash flow generated from operations remained robust. Our Specially Carbon Black business had record results and our Rubber Carbon Black business managed a tough market relatively well. Results illustrate that our strategies of expanding our portfolio of high value and more profitable carbon black products while growing with the markets continues to work.

We grew volume about approximately 12% marking the third consecutive quarter of double-digit growth for Orion. Organic growth in the second quarter, that is excluding the sales volumes from the Chinese business we purchased last year, totaled 6.5% well above the estimates for the industry during this quarter.

Adjusted EBITDA rose 3.2% to an impressive €57.7 million in the quarter from €56 million in the prior year's second quarter. This is our third consecutive quarter of both sequential and year-over-year growth. Adjusted EBITDA margin for the business rose to 23.3% reflecting the overall strength of our business model.

Finally, adjusted earnings per share rose €0.01 as well or about 3% to €0.35 per share while earnings per share rose €0.04 to €0.28 per share. As you will see shortly, this strong performance was driven particularly by an outstanding quarter by our specialty carbon black business following a similar great first quarter performance from that group.

Slide 5 provides you some detail on our volume mix by both business and geography, adjusted EBITDA by business and two key profitability trend lines for our two businesses. We also comment in the footnote on progress with improving our mix of technical grade rubber products, those products that require special technology or support to be successful in the marketplace and which in turn carry high margins.

On these charts you can see that our Specialty Carbon Black volume as a percent of the total rose quarter-over-quarter to almost 22%. Adjusted EBITDA for Specialty continues to rise as a percentage of the total increasing to 67% of overall adjusted EBITDA at all time high versus 54% in the prior year on a combination of strong results for Specialty with weaker results in Rubber.

We are increasing our sales in high margin grades in both Specialty and Rubber as we focus on improving our overall mix. This focus on higher margin grade is a key performance metric for our business as we monitor the success of our efforts to expand these more profitable growths.

Our gross profit per ton and adjusted EBITDA margin per quarter are also shown on this chart. As you can see, our specialty carbon black business continues to grow not only in volume but also in the quality of the products moving our gross profits to turn over time, boosting adjusted EBITDA profitability and margins. This is a clear result of our ongoing strategic initiatives to shift to higher value add products supported by significant increase in our technical sales force and in unrepresented regions and a stepping up of our product and marketing support capabilities around the globe.

Rubber Carbon Black gross profits per ton had been pressured for a number of quarters by challenging feedstock pricing environment, a situation we see really coming this year as a result of surcharges in Europe. Nevertheless the business has maintained a relatively stable adjusted EBITDA margin because of low oil pricing impacting reported revenues and the shift to advanced grades which compensated for the decline in adjusted EBITDA. Our production volumes remain both well diversified and in line with regional demand.

Slide 6 gives you more detail on our Rubber Carbon Black business. The environment for this business was challenging in this quarter as well as in the first quarter of 2016. The upturn in oil prices that began in February did not address the full imbalance that occurred when oil prices fell from the high point in 2015. The impact of feedstock differentials required us to seek and achieve surcharges in Europe, where this impact has been most dramatic.

In addition it prompted an immediate review of our European production network in order to improve performance, resulting in our recent announcement to engage the French subsidiary in discussions regarding a potential closure of the facility. These discussions are underway and we will inform you of any changes on this matter as they develop. This development underscores the importance of focusing the rubber business towards MRG and technical kind of products devoting capacity to higher margin grades more consistent with Orion's advanced capabilities.

Volumes increased 11.3% to 229 kilo tons in the second quarter as a result of the acquisition of the Chinese business which provided nearly two thirds of the growth the quarter. But in addition, European growth was stronger than anticipated given the headlines about economic activity in the EU. Absent the contribution from China, volumes would have grown at slightly under 4% a level still is somewhat better than projected worldwide GDP growth for the period and consistent with our strategy to maintain or exceed the pace of the markets.

European demand this quarter was fueled by robust auto build and recovering sales of replacement tires, Combined sales in the remaining region were down as some volumes were shifted some rubber to specialty black sales to supply strengthening demand from that segment and we experienced some weakness in replacement tire demand in certain regions.

Revenue declined by 19.4% to €149.9 million on low oil prices and the resulting pass throughs of lower feedstock costs to our customers. Gross profits declined falling from €45.1 million to €38.1 million due to negative feedstock impact and to a lesser degree unfavorable foreign exchange translation effects as well as an increase in depreciation. These were partially offset by our sales in China. The differential impact in the second quarter remained a meaningful headwind for us amounting to €2.2 million only slightly better than €2.9 million impact seen in the first quarter of 2016.

Looking ahead, the differential impact should lessen as imbalances in the oil market correct themselves although the timing remains somewhat unpredictable. Adjusted EBITDA in the Rubber Carbon Black business decreased this quarter as a result of these impacts dropping 26.5% to €19.1 million. Adjusted EBITDA margins decreased 120 basis points to 12.7%. Although it has been a tough first half for Rubber we are more optimistic regarding the second half of the year for a number of reasons.

Surcharges in Europe were implemented during the second quarter and will come into full effect in the second half of 2016. Russian and Chinese carbon black imports into our markets have declined alleviating some competitive pressure. We also had several variable cost savings initiatives that were initiated earlier this year to offset raw material cost impacts which will begin to show effect in the coming quarters.

Volumes should be stable. Additionally, as we have recently announced, we are engaged in discussions which could result in the closure of the plant we have in France, thereby pushing our production network to a more efficient state. If these discussions lead to such a decision, it will represent another important step in our efforts to concentrate our resources at more efficient facilities and devote our capacities to higher margin products in both specialties and rubber.

Specialties had an outstanding record setting quarter. This business had its best quarter ever practically every critical metric. Volumes in the quarter increased 15.9% to a record 63.4 kilo tons versus 54.7 kilo tons in the prior year with gains occurring in all geographic regions and practically all sub segments of the business.

Growth in Asia-Pacific continued to be particularly robust. The offering proves that our ongoing global investments can bolster our sales and technical support and drive increased sales of our new products and product extensions are paying dividends. Revenue increase modestly gaining 1.6% to €98 million as strong volume growth more than fully offset the negative impact from price declines resulting from feedstock cost pass through. Gross profit for Specialty in the quarter rose 21.2% to €48.8 million as our gross profit per ton increased 4.6% to €769.8 per ton.

This performance results from our excellent volume growth along with margin improvement from strong sales of our premium products and our ability to maintain pricing despite lower feedstock costs. Leverage produced by the collective performance of these metrics result in an adjusted EBITDA of a record €38.7 million compared to €30 million in the prior year's quarter.

I think it is worth pointing again that specialty, our fastest growing and more profitable business is now accounting for over two thirds of our adjusted EBITDA.

I will now turn the call over to Charles, who will begin with an overview of our consolidated performance.

Charles Herlinger

Thanks Jack and let me also wish everyone a good morning. Turning to Slide 8, and our consolidated second quarter results, as Jack stated, our volumes increased by 12.2% or 31.9 thousand metric tons from the prior year to 292.4 thousand metric tons. Faced with sales price declines resulting from the pass through of lower feedstock costs our revenue this quarter was €247.9 million compared to €282.3 million last year. Our overall contribution margin increased 5.4% to €121.4 million in the second quarter of 2016 versus €115.2 million in the prior year's period driven by the very strong growth performance of our specialty carbon black business.

As the top waterfall chart on the right hand side of the slide shows, the improvement in contribution margin is driven by volume growth which more than offset headwind in both differentials in currency. Referring to the second waterfall chart, the contribution margin improvement we realized in the quarter was the primary factor driving the adjusted EBITDA growth of 3.2% to €57.7 million and an impressive adjusted EBITDA margin of 23.3%, which represented an increase of 350 basis points above last year's second quarter reflecting strong operational performance, but also the impact of lower feedstock costs on our reported revenues.

Lastly, our net income in the second quarter of 2016 was €16.5 million or 13.1% increase from €14.6 million in the prior year's quarter. As the final waterfall chart on Slide 8 illustrates, adjusted EBITDA growth and lower financing costs were the main drivers in this regard.

Let's turn to Slide 9 which reviews our year-to-date cash flow dynamics as well as covers our key balance sheet metrics. As we've continued to demonstrate over many quarters, our business is a strong cash flow generator. In the first half of 2016 we generated €102.8 million from operations.

Our uses of cash flow this quarter which include capital expenditures, interest payments, acquired debt repayments and dividends totaled €79.8 million giving us available free cash flow of €23 million, which provided us with ample flexibility to voluntarily repay debt of €20 million and repurchase approximately 300,000 shares of our stock in the first half of 2016. An additional voluntary debt repayment of €20 million was effected in July 2016 subsequent to the close of the second quarter.

Turning to our balance sheet, our net working capital totaled €181.4 million as of June 30, 2016 compared to €183 million as of December 31, 2015. Days of net working capital at the end of the first quarter were 66 days. As of June 30, 2016 the company had cash and cash equivalents of €64.9 million compared to €65.3 million versus December 31, 2015. The company's noncurrent indebtedness as of June 30, 2016 was €622.6 million with net indebtedness of €574.6 million which represents a 2.73 times LTM EBITDA multiple.

Our current goal remains to steadily reduce this multiple over the next several years through adjusted EBITDA growth and deleveraging. As a reminder, our total debt chart on the bottom right hand corner of this slide is designed to illustrate the fact that some of our debt is denominated in U.S. dollars, but reported in euros and thus gets revalued every quarter as these currencies fluctuate.

Let's move on to Slide 10, which represents our current full year guidance with some cash flow analysis. On the negative side, although we have seen oil prices recover somewhat since February, they have yet to realize any meaningful benefit in our rubber business as feedstock differentials have remained a persistent and significant headwind for us.

On the positive side we remain very much committed to achieving pricing in the rubber business that adequately compensates us to the value we provide by way of price surcharges during this year and price increases as we renegotiate contracts for 2017. The performance of our specialty business remains very positive driven by quality volume growth, fueled both by our investments in technical sales and capability and our product portfolio.

Based on the overall encouraging progress our business as a whole made during the first half of 2016 as well as our expectations for both, our specialty and rubber businesses in the second half of 2016 we are tightening our 2016 adjusted EBITDA guidance towards the higher end of our previous range and are now guiding to between €215 million and €225 million from the prior range of €205 to €225 million.

This is based on the assumptions that volume growth will be in line with current GDP expectations and that oil prices and exchange rates will be at the levels seen during the second quarter of 2016 with negative feedstock impacts not worsening from levels seen in the second quarter of 2016.

The capital expenditures our guidance remains at about €60 million, for depreciation €60 million as well and for amortization €20 million. Our tax rate expectation on pretax income remains at 35%.

I will now turn the call back to Jack who will provide a few comments on our operational priorities and wrap things up before we head to Q&A.

Jack Clem

Thank you, Charles. I previously discussed with you the 2016 operational priorities we've listed on Slide 11. So I'm not going to review them individually. It is however important to say that these remain our priorities and are being vigorously pursued.

Let me give you a few examples of what we're doing. As I previously mentioned, our China facility continues to executive extremely well as we expand our specialty and technical grade mix there. In fact our Chinese team increased its second quarter volume by about 20% versus the preceding first quarter and it was up over 5% against the prior year's second quarter.

At our Cologne, Germany plant we have worked through the conditioning of the post treatment facility we recently installed and are now filling the unit with new sales of premium grade targeted at high end coating and printing markets.

In a similar manner we are leading capacity increases for post treatment facilities in Korea which will soon be at capacity based on our outlook for sales in the region. We have expanded our flexibility to receive feedstock from multiple sources in certain of our plants and our variable cost savings initiatives continued to run even in his low oil price environment with the installation of higher efficiency reactors and improved heat recovery equipments.

As a result of these initiatives and those we have yet to accomplish, we remain upbeat essentially in both of our segments indeed about a lot of hope. We have the right teams and strategies in place to continue growing profits in both of our businesses by upgrading our mix and the capacity to support advanced grades, by providing unparalleled technical and application support on a global basis, by optimizing our production footprint to increase asset efficiency and by continually improving feedstock conversion costs.

As always, we wish to thank our investors for their confidence in Orion and all of our employees for their hard work thus far this year.

With that operator, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of John Roberts with UBS. Please proceed with your questions.

Unidentified Analyst

Hey guys, this is Josh [indiscernible] on for John. I just had a question on the feedstock differential in terms of relooking with index pricing, is there something that you guys can see that will need to happen to help that out and is that something like higher oil volatility or just time, what are your thoughts around that?

Jack Clem

It is a little bit of all of those Josh. These things became, they coupled when the price fell pretty dramatically. We think as price rises back up it tends to adjust itself. In the meantime, we think even in the absence of that type of rise there is going to be certain arbitrage opportunities and certain movements in all over the market that will bring some level of stability back to it, but it's not happening quite yet.

And we've really dealt with this for both of the quarters of this year and continue to deal with it so far to some extent this year. In the meantime what we've done is we've addressed the short term to keep clean the area where it hurt us the most in Europe with the application of these surcharges which have been very well implemented in that region.

So, I mean as a short term fix, that's one thing. The other factor here is, we will continue to look for ways of adjusting the formula to better mimic actually the indices that we have out there in the market which is an ongoing work in our organization right now. We're targeting towards the 2017 negotiations.

Unidentified Analyst

Okay, that's helpful and just in terms of the feedstock supply arrangement that you guys highlighted in the release, does that represent total suppliers that is 7% and just are you able to give some type of feel and like all else equal basis, how things might go directionally for you guys?

Jack Clem

Oh, actually its one deal in one reach and that's as far as I would be willing to say too about it right now.

Unidentified Analyst

Okay, and just one last one on specialty side of this, so your gross margin on a dollar per ton basis, I have about 6% in the first half over 2015. Is that something you guys think is sustainable or as oil prices eventually rise at some point is that something that would have to be given back or is there something that's been changed fundamentally that helps you guys retain a higher margin level there?

Jack Clem

Well, I mean we've appreciated a lot just from the fact of leverage as we've grow that business. So we've seen an expansion of the gross profit per ton just simply from the volume expansion, but we've also had a very nice increase in our product mix. This product mix will go a long way towards making these margins sustainable as we go forward.

Clearly we've benefited from the fall in feedstock price and the feedstock price rises will have some pressure, some competitive pressure and customer pressure to see those margins compress a bit, but we've got activities in place right now to see price increases. In fact, I believe there is an initiative from many people in the industry to increase these prices to deal with this sort of thing.

So, hopefully we will be able to maintain that. We've certainly been able to do so, in this most recent rise in price with products we are moving up some $10 a barrel or so over the last 30 to 45 days and we have been able to maintain it during that period.

Unidentified Analyst

Okay, thanks.

Operator

Our next question comes from the line of Ivan Marcuse with KeyBanc Capital Markets. Please proceed with your question.

Ivan Marcuse

Nice quarter, thanks for taking my questions.

Jack Clem

Hi, how are you doing?

Ivan Marcuse

On the speciality business, which is obviously having a very good year to date, is there any sort of seasonal as we go from first half into the second half, is there any sort of seasonal impact or mix to think about in terms of volume or should sort of these volumes stay at this level and the mix or stay here, so all of it is equal and margin should, yes at least on the gross margin part stay stable [indiscernible]?

Jack Clem

You typically see a bit of a slowdown in August. European business seems to slowdown in August when we see that and then in the past at least we’ve seen a slowdown in December, although I have to say the fourth quarter of last year was completely strong. So, if we continue to repeat what we saw last year in the fourth quarter, we’ll see a bit of a slowdown in August, but to some extent I don’t think it is going to be that material second half versus first half.

Ivan Marcuse

Okay and then in terms of feedstocks, I understand that they remained a headwind. Should they be, should that I guess, I don’t know how to say it, but the impact on a year-over-year basis or an impact should be any more in the second half versus the first half or will the headwind be roughly the same?

Charles Herlinger

Well, I mean hi, Ivan this is Charles. The forecast, the guidance we’ve given for the remainder of this year, for this year as a whole it is predicated on the fact that those differentials stay around, roughly around the level we have seen in Q2. That’s what we think, so that’s our assumption at the movement.

Ivan Marcuse

Okay, then moving to - looking at your guidance, if you – based on what you did in the first half and midpoint of your guidance you are looking for EBITDA to sort of stay I guess flat plus or minus a couple million dollars second half versus first half?

Charles Herlinger

Sorry, up significantly versus last year.

Ivan Marcuse

Right, but your pricing should get a little better, specialities is going to remain fairly stable plus or minus little bit and volumes I think you said are going to get a little bit better on the rubber side and I imagine there is a little bit of some cost efficiencies. So, why wouldn’t the second half be better than the first half which is, what is going against you?

Charles Herlinger

Nothing is going against, particularly Jack commented when we were just talking a few minutes ago, that speciality August can be, historically is a little bit quiet December vacation period as we’ve seen every year and that applies essentially to rubber as well, but those are the factors.

Ivan Marcuse

Okay, great and then I’ll jump back in the queue. Thanks.

Operator

Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

Kevin Hocevar

Hey, good morning everybody and congrats on a nice quarter.

Jack Clem

Hi, Kevin.

Kevin Hocevar

Hi, wondering if maybe we could talk about speciality real quick. Obviously the volumes are doing phenomenal here growing 16% volumes year-to-date. I was curious how much do you think the markets going, how much do you think is share gains? Obviously these share gains are kind of taken from somebody else, do you have any concerns that, people are trying to cover this and take some of the share back later or do you think that, you can kind of sustain these types of volumes and keep growing well above the market?

Jack Clem

Well, we had this exact question at the first quarter earnings call about the ability to continue to grow at this rate. We question ourselves whether we would be we're able to grow that we would see these kind of double-digit growth rates in the second quarter. In fact we did see them and we’re on the track I think probably for the year to have very good growth.

I am not too sure that will be sustained for all four quarters of this year, it would be great if it would be, but that hasn’t been said, it makes us assess really the fundamental growth rates of the specialty markets as to whether they might be growing actually during this year at a greater rate than what we've said in the past.

Because what we've said in the past is that we thought the specialty markets typically grew in GDP plus a couple of points. There may be some dynamics in the world right now that are pushing that to greater rates, some change over, some extensions of this particular material and some of the polymer applications and things like that.

So, there may be two things going on here. One is a fundamental increase in the growth rate of the specialties and market which would be exceedingly good news for this particular segment. And the second is, I think we probably are growing at a greater rate even and I don't think the market is growing at 15% per year. It would be nice if it was, but let's assume that it’s higher than what we’ve said and the remaining increment is actually growth rate of ours greater than the market.

That’s understandable, because as you know we invested heavily in a lot of technical and sales people around the world in these under-represented regions, and I think that's beginning to pay off handsomely for us with extensions and just simply a greater deal of technical attention to our customer base. So I am pleased with that.

We’re already exact the competitive response, I mean it – we've got good competitors out there and certainly they've seen what we've done. I think to the extent we can see their growth rate or estimate their growth rate, we don't think it is at higher level. We feel the pressure out there, but we do what we need to do. We work with our customers, so we come up with the top solutions and pricing and service that we feel is appropriate and we'll let the competitive battles go.

Kevin Hocevar

Okay, great. And then coming back to Ivan’s question real quick, on differentials, I think it was €2.2 million €2.4 million headwind this quarter. And I thought that third quarter of 2015 was really the low point for that, and I think fourth quarter was better, but not by a lot. So do you think that the comps get easier. So when you say that you expect differentials to kind of stay where it is at, does that mean that the year-over-year headwind would lessen from that €2.2 million €2.4 million or are you saying you expected that to remain at that €2.4 million headwind per quarter for the balance of the year?

Charles Herlinger

I mean the third quarter comparisons are a bit complicated, because you’ve got two moving pieces. My comment was about the absolute level of differentials we're experiencing or experienced in Q2 and what we expect for the rest of the year. So that is the absolute level of differential we're having to pay or had to pay in Q2 and we assume that's going to stay about at the Q2 level for the rest of this year.

To your comment it does when you compare it to prior quarters because of what the prior quarter had done, it fluctuates around, but it's happy to go through it, this is probably a bit too many moving parts for a call like this.

Jack Clem

So Kevin, sometimes it's difficult to talk about the differentials without talking about the counter measures, the significant counter measure and surcharge that we put in place. And we've gone a long way towards dealing with that €2.2 million headwind in this particular quarter with full sets we'll see in the second half from these surcharges.

Kevin Hocevar

Okay. And then to that point, EBITDA in Rubber Black is about €19 million a quarter here in the first half of the year. So do you expect with the surcharges in place for that to improve in the back half and can you give us some type of expectations as to how much you'd expect that to improve?

Jack Clem

We do, because obviously the surcharges are going in place. They started to go in place in second quarter, but will come fully online as it were in Q3 and then Q4. So we do expect everything else being equal, a pickup in Rubber Black. Like any business there are a lot of moving parts. And that was one of the reasons why we look with confidence into the remainder of this year and the tightening of our guidance.

Kevin Hocevar

Okay, great. Thank you very much.

Operator

[Operator Instructions] Our next question comes from the line of Charlie Webb with Morgan Stanley. Please proceed with your questions.

Charlie Webb

Hi guys. Well done again on the results, Q2 results. So coming back to Specialty Carbon Black I just wonder if could give us a bit more color on the end markets they've been driving this very good growth now for two quarters, first question. And the second question, what was the impact from the Rubber Carbon Black plant turnaround in Q2? If you could quantify that, that would be great.

Jack Clem

The second part of your question dealing with the rubber black turnaround, are you talking about the maintenance turnaround there? Is that what your question is?

Charlie Webb

Yes. You mentioned maintenance turnaround is having an impact on non-margins is one of the contributing factors.

Jack Clem

Yes. Let me address the first one, Charles can take on the second one. When you look at the Specialty business, as we said in our commentary, we see growth in all regions and practically all sub-segments. What does that mean? It means that when we see –when we look at our business, we think about the split between polymers for instance, coatings, adhesives, printing inks in special applications, even down to batteries. And admittedly, the fact is when we look at the detail of the growth in this particular quarter and in fact, in the first quarter, we see that throughout, takes diving just a little bit deeper into that, so what would be driving that?

We have auto demand in the United States, you had well around the world, in fact. But the auto demand particularly in Europe has been very robust. So we've seen a very nice pick up in the first half in the automotive demand for coatings and also our market for adhesives and sealants materials that go into windshield sealants and things such as that.

The tire market in Europe has been exceedingly strong interestingly enough. There's a dynamic going on there, which we had not seen in the past. But we're a significant growth in polymer pipe market as well as the line cable market, shifting over to the U.S. The pipe market there had been fairly depressed through 2015 because it was driven a lot by the oil and gas industry, which that story is well-known.

But in the second quarter this year, we actually begin to see that pick up somewhat. So you've got a polymer pipe business pickup there as well. And our Asia-Pacific business, again across-the-board, strong sales in coatings, strong sales in adhesives and sealants and a very good market in what we call our fiber applications, which typically go into apparel, which has been - continues to be quite strong.

Charles Herlinger

Yes. Charlie, you had a question about the impact of the heavy turnaround schedule, low single-digits in this quarter.

Charlie Webb

Okay. Thank you very much guys.

Operator

Our next question comes from the line of Jeff Secaucus with JPMorgan. Please proceed with your question.

Unidentified Analyst

Hi, good morning. This is [indiscernible] in for Jeff.

Charles Herlinger

Hi, Yoyo [ph].

Unidentified Analyst

Hi, you raised your guidance for the EBITDA for the year, how much of that is due to stronger-than-expected volumes and how much is because of the weaker euro benefit?

Charles Herlinger

Let me pick up the weaker euro benefit as it were. I mean to be – the FX impact we've seen this year is being relatively small. We've talked previously about some about the impact of currency on our business. So the FX movements have not played a significant role in the favorable reassessment of our guidance for the year.

Jack will give you some feel for the volumes to the second part of your question. But this rating, of rerating of the guidance Yoyo, is really a function of two things fundamentally. One is the fact we've got a good, very good first half under our belt. So we've got a better line of sight for the year as a whole, obviously. And secondly, we've touched on this earlier, we like, obviously, the dynamics in the Specialty business, which we talked about today. And also we look with some measured confidence in the second half regarding rubber, although, we are obviously, managing a number of factors that we've talked about.

Jack Clem

Regarding volumes, I mean, as I've said in the commentary, we think the volumes will remain reasonably stable as we go into the second half. And what does that really mean? It means that the first half was surprisingly strong in the specialty area and we continue, we believe that we'll continue at a stronger pace than the market, maybe not at a double-digit growth rate as we've seen the past

But at any rate, I don’t see any reason to say anything other than the second half is going to be comparable as the first half, in our view, for volumes, with very strong build up of the specialty area. In fact, it is a lot of what we’ve done with our guidance. We'd say we've got two quarters, a full half year under our belt at this point. So it gives us confidence to raise that, based on an expectation of the second half built on a stronger foundation of the first half than what we had anticipated when we first set our guidance.

Unidentified Analyst

I understand. So can you talk a little bit about what’s your realization rate in the rubber business and in the specialty business?

Jack Clem

Specialty business is running in the high 80s. That’s a bit of a tricky number, okay? Because there are – we can’t really think about that business quite like you can about the Rubber business, which I'll speak to in just a moment because we have the ability to switch capacities back and forth depending on what particular product and what we wish to sell to maximize margins. But I’d say largely speaking, we are tight, but I would say, comfortably tight at this point.

The ability to meet shipments is always our issue in specialties and we continue to look at, as we've said in our earnings release and other places, we continue to look at the areas where we have some bottlenecks, such as some of our post treating facilities to make sure that we stay ahead of the curve, making sure that supply always stays ahead of the demand in this market.

So, having said that, that’s kind of the specialty story. The rubber story, we’re running globally right now in the mid-80s. And it’s a bit of a mixture between some of the businesses that are running higher than that and some below. I’d say, generally speaking, the European business right now is the tightest. It’s running in the low-90s, it seems to be extremely tight right now throughout Europe, both in the tread grade and the carcass grade materials that we sell.

Korea, U.S., roughly in the middle 80s kind of average operating rates that we’ve got for the rest of the facilities. Our Brazilian facility, as we’ve said in the past is actually running a little bit stronger than what you would expect out of Brazil. There’s a couple of things happening down there. First of all, you have to recall that our Brazilian facility is reasonably small. So small move down there and enable us to move capacity utilization in that facility up fairly quickly.

But it does appear that several of the tire manufacturers in Brazil are actually using that as an export platform right now because the cost seemed to have worked to their advantage and we’ve seen a net difference in trade ballots in Brazil. So our business down there is actually a bit stronger than what the headlines of Brazilian economy might reveal. And I’d say the rest of the regions that I perhaps haven’t mentioned are operating roughly at that midpoint.

Unidentified Analyst

Okay, thank you so much.

Operator

[Operator Instructions] I’m showing that there are no further questions at this time. I would like to turn the call back over to Mr. Jack Clem for any closing comments.

Jack Clem

Well, thank you, everybody for joining our conference this morning. I think it should be clear that we’re very confident about this business. As I said earlier, this has been a spectacular first half of the specialty segment, and that’s a performance that we have every reason to believe it’s going to continue and even improve as we go forward.

There’s a lot of good activities out there in the product development, product expansions, people on the ground and just a very ambitious and healthy team running that organization right now. We’re very pleased with the performance there and we hope it’s reflected in your view of the quality of this company and what it’s doing to our overall business.

The Rubber business as I mentioned, saw a bit of a tough first half, but we’ve got a lot of good initiatives in place right now to deal with that with our surcharge, anticipation of price movements going into or for the 2017 negotiations. With our operating rates where they are right now we think that, that’s certainly plausible. And the indications are that there are price initiatives going on currently in most of our markets right now for Rubber to recover some of this differential issue which is an industry wide impact. So we're hopeful to see that improve as we go into 2017.

Buy having said that, again thank you for your attention. We appreciate it and look forward to speaking to you at our next conference call. Thank you.

Charles Herlinger

Thank you.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect your lines and have a wonderful day.

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