January 28, 2022

Olin Epoxy Highlights from Investors Call

Olin Corporation (OLN) CEO Scott Sutton on Q4 2021 Results – Earnings Call Transcript

Jan. 28, 2022 1:52 PM ETOlin Corporation (OLN)

Olin Corporation (NYSE:OLN) Q4 2021 Earnings Conference Call January 28, 2022 9:00 AM ET

Company Participants

Steve Keenan – Director of Investor Relations

Scott Sutton – Chairman, President and Chief Executive Officer

Todd Slater – Vice President and Chief Financial Officer

Scott Sutton

Yes. Thanks, Steve. 2021 was a solid year for Olin. I am extremely proud of the complete Olin team for establishing that this company can deliver expected profitability and cash flow. Driving that 2021 performance stake in the ground was critical to our future improvement as there were many temptations to a falling back into a historical peak trough experience. However, we resisted all of those temptations and instead demonstrated the commitment to our leadership model of lifting Olin system value above all else.

Now and as called out on Slide number 3, it is time to demonstrate that we have broad control over improving our value delivery in 2022 and that we have multiple 2022 and 2023 growth vectors in all three of our businesses.

As shown on Slide number 4, we set our market participation according to the weaker side of the ECU. And consequently, we were able to lift our value on both sides of the ECU through 2021. We won’t sell into a poor quality market. And in fact, we are pressing that principle more than ever heading into 2022, as shown on Slide number 5.

Instead of choosing to produce and sell incremental volume and negatively impact our market quality, we are instead reducing our capacity utilization and purchasing product liquidity from the market to satisfy our participation level. This is one tool to prevent a traditional negative cycle for Olin and bridge to the future favorable supply/demand structural thematic.

Slide number 6 shows our increased purchase of global liquidity as our parlaying activities grow. For the moment, those parlaying activities primarily serve to complement our leadership model of lifting our system value. But those activities will additionally serve Olin well in the future as we grow and we require volume produced outside of our asset perimeter. The favorable supply/demand structural thematic is upon us.

And as shown on Slide number 7, as the world appears to be underinvesting in ECU capacity on the order of 17 world-scale ECU plants over the next six years. This forecasted underinvestment comes at a time when clear positive demand megatrends solidify, as shown on Slide number 8. This same scenario impacts epichlorohydrin as well as base ECUs.

Moving to Slide number 9. The impacts, activities and outcomes for Olin are clear. The forward structural thematic suggests demand growth is much greater than supply growth. We have taken many actions to improve our system value and we expect to become the world leader in global liquidity as well. The result is that Olin defeats the cycle, expects to deliver $8 billion of levered free cash flow over the next five years, approximately equal to our current market capitalization and achieves the improved valuation multiple we deserve. All three of our businesses succeed and materialize in their clear growth vectors.

Winchester grows shooting sports participation via the Shoot United mission and grows its military business via the demands of the next-generation squad weapon. Epoxy grows its upstream value impact in both aromatics and epichlorohydrin and grows its downstream value impact via additional engineered solutions volume into clean energy, composites and infrastructure. And CAPV becomes the largest buyer of global liquidity and grows by matching our significant excess vinyls upstream capability in EDC and VCM with the right PVC players.

These and other growth vectors will become a key subject of future earnings calls. None of this is a 100% possible without a platform that is sustainable at Olin. We must have the right ESG program. So we have decided to raise the bar on some of our targets shown on Slide number 10 after having met many of our initial ESG goals earlier than targeted. There is more to come here as our stakeholders continue to ask for enhancements in our ESG public profile, and we will continue to upgrade our contemporary scorecard on Slide number 11.

So that concludes my opening comments. So Rocco, we are now ready to take questions.

Michael Sison

Hey. Good morning, guys. I guess my question is can you maybe help us better understand when it makes sense for Olin to produce caustic or EDC versus sort of trading it, procuring it? I know – and maybe how much volume sort of goes into that calc. I mean, obviously, you’re going to still produce a lot. But is there sort of a swing volume that you will sort of move around to make that trade? And then – what do you think the benefit was in the fourth quarter in terms of either margin or EBITDA?

Scott Sutton

Yes. Sure. Hi, Mike. I mean, look, sometimes it’s just more effective to buy. I mean I get your question on how do you know how much, right? And a lot of things go into that analysis for us. But any time we see signs of a poor quality market developing we’re likely to pull back a bit. And you may have noticed that we do have a slide in the deck now where we’re trying to give some quantification around that. So in the fourth quarter, it was roughly about 12% of our sales volume, and that is sales volume for any products that are ECU-oriented or ECU-based derivatives, which is most of our volume. I think that number got up to about 12%.

So in the fourth quarter, Mike, the direct benefit of that is a disbenefit, right? I mean that cost us a lot to do that. But what it is, is a benefit for the future. It’s a benefit for 2022 because we’re just not going to sell it to a poor quality market, and we’re going to continue to improve the value of the ECU and ECU derivatives, and that’s not a one-quarter play. We could have not made those moves in the fourth quarter and produced a bigger result, but that could have led to a lower outcome in 2022 and 2023. So there’s a lot that goes into that.

Michael Sison

Got it. Okay. And then just as a follow-up on your ECU calc, it’s more than doubled since you’ve been presenting it. You continue to say it’s undervalued. At what level will you say it’s fairly valued or above? And then when we get to that level where you think it’s – where you’re getting the right value for your volume, is that sort of the number where you consider maybe adding some capacity given that demand is going to be a lot stronger over the next couple of years?

Scott Sutton

Well, yes, I mean the value has become better. I would say it gets even more fairly valued when there’s recognition that, again, there’s no imaginary cliff there that we’ve set it at a value that doesn’t cycle up and down, then we’ll feel a bit better about it. As far as adding capacity, right? We don’t have plans to be adding capacity through an organic means. In fact, we’re practicing a bit at our parlaying activities because when we do grow and we have a number of growth vectors in place, we’ll rely on that skill that we’re developing today to go out and access liquidity in the world that is actually produced on other assets to support our growth.

Kevin McCarthy

Okay. And then tempted to ask you about the sequential trends in Epoxy. Prices have hung in quite well, I think, as the fourth quarter progressed. How are you thinking about sequential earnings taking the cost side into account?

Scott Sutton

Well, I think we’ve called out that we expect net-net, our total chemicals earnings to be close to flat going into one quarter versus fourth quarter. In Epoxy, we are facing some cost pressures, just like we are in some of our other businesses. But that’s the business where we’re pressing our model harder than any other place, right? There were some signs of poor quality conditions temporarily developing, especially in the Northern Hemisphere in the wintertime when there’s not as many coatings needed.

So we did slowdown our rates and we did execute some parlaying activities. And what we’re really doing there is just trying to bridge through that gully because really, if you think about demand in 2022, it’s absolutely robust. And you think about the categories of that, marine coatings look good, composite work and lightweighting and automobiles, wind blade activity for turbines very, very bullish there and infrastructure isn’t going to hurt us at all either.

Arun Viswanathan

Great. Thanks. And as a follow-up, maybe I can just ask a question on Epoxy. There has been a notable improvement in Epoxy margins over the last year or two. I guess do you see this level as kind of the new structural level of earnings power within that business? Should we expect margins to remain north of 20% on an EBITDA basis from here on? Are you kind of implementing a similar ratchet strategy of preserving value in that business as well?

Scott Sutton

Yes. Our expectation for margins in Epoxy is for them to expand from where we are in the fourth quarter. And there’s just so many upsides in that business. We haven’t fully implemented our model across the upstream part of that business. But the great fundamentals around some of the demand factors that I talked about before, especially as we bridge this fourth quarter and first quarter gully that we’re working ourselves through, I expect mid-year that business to be rocking.

Steve Byrne

Yes, Scott, this comments you just made about the challenges to building an integrated ECU complex would seem to be even greater for your customers and thus their interest in back integrating into chlorine would be extremely low. And that’s what seems to enable you to use your epi business since you’re also downstream into Epoxy. You leverage that to drive these tolling agreements with these Epoxy customers. Could you not also do that with EDC? If you got into the PVC business, you could leverage that EDC position with a non-integrated PVC customers or potentially MDI since you’re also into aromatics or chlorosilane. Do you see opportunities to do this and leverage that chlorine business you have and your customers’ lack of interest in back integrating?

Scott Sutton

Yes. Thanks a lot for the question, Steve. Yes, look, you’re exactly right. I mean this is an upside for the company. And you’re going to hear us shift more of our discussion to these growth vectors. And one of the growth vectors that we will be talking about is the one I mentioned in some of my opening comments where this is an area, in other words, upstream vinyls being EDC and VCM where we have significant extra capability and certainly incremental capability, where we might could match up very well with the right PVC leaders. And that same thing can apply potentially to other chlorine derivatives. And this is a great way to grow the company.

Steve Byrne

Okay. And also wanted to get your update on some of these legacy chlorine contracts that you’ve talked about not renewing on expiry. Did some of those roll off at the end of the calendar year and are there more to go on that?

Scott Sutton

Yes. Some of them did roll off. So we’ve set those back to freely negotiate. And there’s still some more that we have that continue throughout 2022. But now it’s the minority of our business is still attached to sort of the non-functioning type of index out there.

Aleksey Yefremov

Thanks, Todd. And the second question is on epi. You’ve earlier talked about potentially big repricing opportunity or value enhancement. Can you talk about progress here? And also, if you have any legacy contracts here similar to chlorine that may go beyond 2022?

Scott Sutton

Yes. Sure. I mean on epichlorohydrin, I’ll just start with the fact that, yes, we do have some legacy contracts. And just like chlorine, we’re working our way through that. We’re not as far down the path as we now are on chlorine with the calendar year turning over. But what I will say about epichlorohydrin, right, we’re likely to participate less in the merchant market relative to our chlorine merchant market participation. I mean it really is about using that epichlorohydrin as a scarce resource that’s really valuable to Olin’s downstream operations, and that’s where most of it gets directed.

Angel Castillo

Hi. Good morning. Thanks for taking my question. Scott, just a question on what we’ve been seeing around Epoxy. I think [indiscernible] maybe talked a little bit more about potential risk of imports and you talked about a poor or I guess a weaker quality market and maybe more activations around the Epoxy business. So curious, as you think about the go forward and reducing the cyclicality of the segment and the business overall, how do you prevent from becoming a little bit more or I guess having more like a marginal producer where you’re reducing your operations and incentivizing others to import more product into any given region?

Scott Sutton

Yes. In Epoxy, I mean what’s happening now? I wouldn’t want you to sort of extend that into a permanent pattern for the future, right? There’s been a large value change in the Epoxy chain. And then you sort of run into end of the year winter in the Northern Hemisphere scenario. And that’s what we had called out in our third quarter earnings is that, that would happen in fourth quarter and it did.

So when these things happen, you do have the opportunity to go get slugs of material that come out of Asia. But those are always temporary and they’re going to be temporary again. And we are getting ourselves partnered up with the right customers for the future. And it’s not about just epoxy resin. I mean no doubt demand for epoxy resin is certainly growing. And there can be some supply expansions in the Epoxy world as well. But it all goes back to epichlorohydrin. Most of those supply expansions are limited by epichlorohydrin, which is where we focus a lot of our landscape activities on.

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January 28, 2022

Dow Investors Call Urethane Highlights

Dow Inc. (DOW) CEO Jim Fitterling on Q4 2021 Results – Earnings Call Transcript

Dow Inc. (NYSE:DOW) Q4 2021 Results Conference Call January 27, 2022 8:00 AM ET

Company Participants

Pankaj Gupta – VP, IR

Jim Fitterling – Chairman and CEO

Howard Ungerleider – President and CFO

Jim Fitterling

Thank you, Pankaj.

Beginning with slide 3, in the fourth quarter, Dow once again delivered top and bottom line growth year-over-year with sales growth and margin expansion in every operating segment. Our results reflect the strength and resilience of our advantaged portfolio and the incredible efforts of the Dow team as we continue to ensure well-being and safety of our team and our communities.

We delivered year-over-year sales growth of 34%, with gains in every operating segment, business and region. While volume declined 4% year-over-year due to supply constraints from several factors, including our own maintenance, lingering effects of weather-related outages and global logistics challenges, we continue to see robust underlying demand across our end markets, particularly for higher-margin downstream and sustainability-led applications. Prices were up 39% year-over-year, reflecting gains in all operating segments, businesses and regions.

Our discipline and agility enabled us to navigate the supply constraints and logistics challenges I just mentioned, dual control actions in China and rising energy costs. We delivered operating EBIT growth of $1.2 billion year-over-year, with margin expansion in every operating segment. Equity earnings were also up year-over-year with margin expansion at our joint ventures in Saudi Arabia, Thailand and Kuwait. These results translated into significant cash generation for the quarter, with cash flow from operations of $2.6 billion, up $901 million year-over-year and cash flow conversion of 88%. And we returned $912 million to shareholders in the quarter, including $512 million through our industry-leading dividend and $400 million in share repurchases.

Our performance in the fourth quarter capped a record year for Dow, which you will see highlighted on slide 4. In 2021, Team Dow capitalized on the economic recovery, achieving record sales and earnings performance despite pandemic-driven uncertainty and industry-wide weather-related challenges. Our focus on cash flow and disciplined capital allocation enabled us to continue to deliver on our financial priorities.

We achieved $7.1 billion of cash flow from operations, bringing our total cash flow from operations since spin to $18 billion. We enhanced our balance sheet by reducing gross debt by another $2.4 billion in the year, bringing down gross debt by more than $5 billion since spin. We have also no substantive debt maturities until 2026. We proactively funded our U.S. pension plan, and successfully executed Sadara’s debt reprofiling, lowering Dow’s guarantees by more than $2 billion. Dow has returned a total of $7.3 billion to shareholders since spin through our dividend and share repurchases, including $3.1 billion in 2021. And we kept CapEx well within DNA as we continued to invest in our higher return and faster payback growth investments. In 2021, we achieved a return on invested capital of greater than 22% on strong earnings growth.

As we turn the corner on the pandemic, we do so with a strong balance sheet and a deliberate and disciplined strategy to decarbonize and grow. We achieved this record financial performance in 2021 while advancing our ESG leadership. Importantly, we announced our disciplined strategy to decarbonize our assets, while improving underlying EBITDA by more than $3 billion as we capitalize on our participation in attractive, high-growth end markets and sustainability-driven solutions.

Our ESG efforts continue to be recognized externally as we were recently recognized by JUST Capital for the third year. Dow earns a top spot in the chemicals sector overall as well as the number one position in the workers and stakeholders in governance categories in the industry. I’m extremely proud of Team Down’s dedication to deliver for our customers and drive value for all of our stakeholders. We will build on these achievements in 2022 as we advance our ambition.

Moving to the Industrial Intermediates & Infrastructure segment, operating EBIT was $595 million, up $299 million year-over-year, primarily due to continued price strength. Sequentially, operating EBIT was down $118 million and operating EBIT margins declined 280 basis points, primarily driven by higher energy costs in Europe and our planned maintenance turnaround activity.

The Polyurethanes & Construction Chemicals business increased net sales compared to the year ago period on broad-based price gains in all regions. Volume declines were primarily due to a planned transition away from a low-margin coproducer contract and our planned maintenance turnaround activity.

Howard Ungerleider

Thank you, Jim, and good morning, everyone.

Turning to slide 6. Our diversified portfolio continues to enable us to capitalize on attractive end market trends with higher-margin downstream products. Our four primary market verticals are each growing at rates of 1.3 to 1.5 times GDP and benefiting from sustainability macro trends. We are meeting this demand with higher-margin solutions such as functional polymers, alkoxylates, surfactants, polyurethane systems, sustainable coatings and performance silicones.

In the packaging vertical, demand for lower carbon emissions recyclable and circular materials are driving demand for Dow’s industry-leading plastics portfolio and in-house application design capabilities.

Dow’s broad suite of products and hybrid innovations targeting infrastructure will continue to benefit from government investments and incentives, with particular demand resiliency in the Americas, Europe as well as in the Middle East, Africa and India. We see global demand across the diverse consumer market vertical remaining at elevated levels, particularly for applications like electronics, 5G, appliances, pharma and home care, where several of Dow’s growth investments are targeted. And in mobility, Dow’s portfolio of specialty silicones, polyurethanes and elastomers is uniquely positioned to benefit from growing electric and autonomous vehicle trends. Importantly, these attractive market verticals are supported by favorable balances across our key value chains with continued strength across consumer and industrial end markets, which we’ll see on slide 7.

Jim Fitterling

In Industrial Intermediates & Infrastructure, our alkoxylates and PU systems expansion projects are closely linked with brand owner demand for higher value, differentiated downstream applications across home and consumer care, agricultural and infrastructure end markets. For example, our surfactants offer an improved environmental profile for leading brand owner laundry and home care products. And our polyurethane system PASCAL technology enables up to 10% greater energy efficiency and appliances without raising manufacturing costs.

Arun Viswanathan

Congratulations on a strong year there. I guess, we’ve talked a lot about the polyethylene market. So, maybe I could also just get you to guys to elaborate on your outlook for polyurethanes, as well as silicones. Could you just comment on those two markets as well? Thanks.

Jim Fitterling

Yes. Arun, thank you. Polyurethane market strength in furniture and bedding, appliances, construction, everything related to housing is very good. In that segment, II&I segment also Industrial Solutions, market strength, pharma, home cleaning, food, we have some feed additives in there, crop defense, intermediates for crop defense and electronics are all very strong. And what you see is that the supply-demand is very constructive to the middle of this decade, whether you’re looking at MDI, polyethylene — propylene glycol or ethylene oxide and ethylene oxide derivatives. So, all very strong through mid-decade.

We think that even though automotive is a little bit constrained right now because of semiconductor chip shortages, we expect that’s going to ease throughout the year and especially in the second half is going to be better. Light vehicle production estimates for this year, about 85 million units around the world. That will be up from last year, so that’s positive. Electric vehicle trends are good for us. There’s more content on an EV for us than there is on internal combustion engine vehicle, but both of them continue to look good. So, I think that’s good. A little bit slower, our operating rates on propylene oxide because the new capacity has come on. But net-net, so the systems business, which is a strong driver of the profitability is going to be good.

Just to give you an example on building and construction, we’re looking at kind of 4% market growth rate similar to last year, electronics, 6%. And so, I think we’ve got a good trend in front of us.

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