Company News
August 2, 2021
Leggett & Platt Q2 Results
Leggett & Platt Reports Record 2Q Results
Aug. 02, 2021 4:10 PM ETLeggett & Platt, Incorporated (LEG)
CARTHAGE, Mo., Aug. 2, 2021 /PRNewswire/ —
- 2Q sales were a quarterly record1 $1.27 billion, a 50% increase vs 2Q20
- 2Q EBIT was $172 million, an increase of $149 million vs 2Q20
- 2Q record adjusted2 EBIT was $144 million, up $94 million vs 2Q20
- 2Q EPS was $.82, up $.87 vs 2Q20; 2Q adjusted2 EPS was $.66, up $.51 vs 2Q20 adjusted2 EPS
- Acquired Kayfoam, an Ireland-based provider of specialty foam and finished mattresses
- Increasing 2021 guidance: sales of $4.9–$5.1 billion; EPS of $2.86–$3.06; adjusted2 EPS of $2.70–$2.90
Diversified manufacturer Leggett & Platt (LEG) reported record1 quarterly sales in second quarter of $1.27 billion, a 50% increase versus second quarter last year.
- Organic sales were up 50%
- Volume was up 31%, reflecting strong recovery in most of our businesses and increased demand versus 2Q 2020, which was significantly impacted by the COVID-19 pandemic
- Raw material-related selling price increases of 16% and currency benefit of 3% added to sales growth
- Acquisitions and divestitures offset each other
Second quarter EBIT was $172 million, up $149 million from second quarter 2020. Adjusted2 EBIT was $144 million, a second quarter record and an increase of $94 million from second quarter 2020 adjusted2 EBIT
- EBIT and adjusted2 EBIT benefited primarily from volume growth and metal margin expansion
- Maintained $20 million of fixed cost reductions implemented in 2020 (versus $36 million in 2Q20)
- 2Q 2021 adjustment for a $28 million gain on the sale of real estate associated with our exited Fashion Bed business
- 2Q 2020 adjustments include a $25 million goodwill impairment charge related to our Hydraulic Cylinders business and $2 million of restructuring charges primarily from pandemic-related cost reductions
- EBIT margin was 13.5% and adjusted2 EBIT margin was 11.3%, up from 6.0% in the second quarter of 2020
Second quarter EPS was $.82, an increase of $.87 versus second quarter 2020. Second quarter adjusted2 EPS was $.66, up $.51 versus adjusted2 EPS in second quarter 2020.
CEO COMMENTS
Chairman and CEO Karl Glassman commented, “Our employees continued to drive strong results in the second quarter despite a challenging macroenvironment. Due to their tremendous efforts, we are pleased to deliver all-time quarterly record1 sales along with record second quarter adjusted2 EBIT and EBITDA. While we continue to navigate inflationary pressures along with supply chain disruptions, consumer demand remains strong and we are increasing our full year guidance.
“We are also pleased to announce that on June 4, we acquired a leading provider of specialty foam and finished mattresses primarily serving customers in the UK and Ireland. The company, Kayfoam, is located near Dublin and has two manufacturing facilities with combined annual sales of approximately $80 million. Kayfoam expands the capabilities of our European Bedding business and establishes a platform in foam technology and finished mattress production. Similar to our U.S. Bedding business, this acquisition allows us to support our European bedding customers anywhere in the value chain from innerspring and foam components to finished products including private label mattresses, toppers, pillows, and other bedding accessories.
“Finally, we remain focused on cash generation while reducing debt and deploying capital in a balanced and disciplined manner that positions us to capture near- and long-term growth opportunities, both organically and through strategic acquisitions.”
https://seekingalpha.com/pr/18418497-leggett-and-platt-reports-record-2q-results
August 2, 2021
Urethane Comments from BASF
BASF SE (BASFY) CEO Martin Brudermuller on Q2 2021 Results – Earnings Call Transcript
Jul. 28, 2021 2:42 PM ETBASF SE (BASFY), BFFAF
BASF SE (OTCQX:BASFY) Q2 2021 Earnings Conference Call July 28, 2021 4:00 AM ET
Company Participants
Stefanie Wettberg – SVP, IR
Martin Brudermuller – Chairman & CEO
Hans Engel – CFO
Martin Brudermuller
Good morning, ladies and gentlemen. Thank you for joining us today. On July 9, BASF released preliminary figures for the second quarter of 2021 and increased the outlook for the full year. Today, we will provide you with further details. Let us begin with the highlights of the second quarter of 2021. The strong growth momentum of the previous 2 quarters has continued. We achieved volume growth and price increases across all regions and all segments compared with the prior year quarter. In some businesses, we were able to restore and, in some cases, increase our margins with the price increases. In others, there’s still some way to go.
EBIT before special items rose by more than €2 billion compared with Q2 2020 and reached €2.4 billion. This is also considerably above the prepandemic level of roughly €1 billion in Q2 2019. Considerably higher earnings in our upstream businesses were the main driver for the strong increase in earnings overall. Compared with Q1 2021, margins in some commodity product lines such as isocyanates slightly declined in Q2 2021 but remain on a high level. In our downstream segments, we managed to increase volumes and prices based on strong demand. However, pressure from increased raw material prices remained high in several downstream businesses.
Let us now turn now on to the macroeconomic data. The indicators for the second quarter are estimates as most of the countries have not yet published their figures. According to the currently available data, global chemical production increased by almost 10% in Q2 2021 compared with the previous year quarter. With an increase in volumes of 28%, BASF Group grew well above global chemical production. All regions recorded strong demand growth. This was most pronounced in Asia, excluding China, and in Europe. In the prior year quarter, these regions as well as North America were significantly impacted by the COVID-19-related lockdowns. And in comparison, chemical production in China had already grown in Q2 2020.
This slide shows our volume growth by region. Sales volumes are compared with volumes in the respective prior year quarters. During the past 3 quarters, we increased volumes in all regions. In Greater China, we recorded double-digit volume growth during the past 5 quarters. In Q2 2021, volume growth in China was less pronounced as the recovery was already in full swing in the second quarter of 2020. Volume growth, however, remains strong at 10%. In Europe and in North America, volumes grew considerably in Q2 2021 as the prior year quarter in these regions has heavily been impacted by the lockdowns due to the pandemic.
We move now on to the volume development by segment. In Q2 2021, we increased volumes in all our segments. The volume increase was strongest in the Surface Technologies and Materials segment. Volumes also grew considerably in the Industrial Solutions, Chemicals and Agricultural Solutions. Overall, volumes increased by 28% or €3.5 billion in absolute terms compared with the prior year quarter.
We now look at our sales development compared with the second quarter of 2020. Sales of BASF Group increased by 56% to €19.8 billion. As already alluded to, considerably higher price in volumes were the driver for this. In total, organic sales growth amounted to 63% in Q2 2021. Currency effects of minus 7% were mainly related to the depreciation of the U.S. dollar. Portfolio measures had a negligible impact on sales.
As I already mentioned, EBIT before special items came in at €2.4 billion. We achieved considerably higher earnings in the Chemicals, Materials, Surface Technologies and Industrial Solutions segment. Further details on the earnings development in these segments can be found in our half year financial report published this morning. In the Nutrition & Care and Agricultural Solutions segment, EBIT before special items declined considerably. I will talk about that on the next slide. Earnings in Others also declined considerably compared with Q2 2020, and this was mainly due to higher additions to provisions for variable compensation components as a result of the strong earnings development.
Laurent Favre
My first question is on that normalization in the upstream, as you said, less than — you still assume that conditions will normalize but just less than before. I was wondering if you could give us a bit more color on the various moving parts there of your assumptions. And in particular, do you see now the risk of further normalization into the first half of 2022? Or do you think that, that scenario is off the table? And if you could separate, I guess, Chemicals and Materials in your comments, that would be great.
And then secondly, Hans, on the ag side, compared to February, when you issued the guidance for slight EBIT growth, there are new moving parts on higher costs and better soft commodities, I guess, currency, if anything, are slightly better. If you net all of those new incrementals, do you think you can grow EBIT slightly in ag for the full year?
Martin Brudermuller
Laurent, then I’ll take the first question. I mean, first of all, let me say that the conditions for Chemicals and Materials segment in the second quarter overall were better than in the first quarter. And that was coming, on one hand, very strong demand because, I mean, in all the different businesses, there is really solid demand globally. There’s also — I think the world has been a little bit surprised by low inventories and then big business, so they have also to fill. And then we have also the supply chain topics. Some of the markets are actually, because also of the supply exchange issues and the shortage of containers, there is not in every business, an arbitrage business from one region to the other.
So partly, they are a little bit more segregated markets, and that’s also why everything reacted quite sensibly in a pattern. And also we have some of our players in the major commodities had supply problems, even coming back to the big freeze in the U.S., which took weeks and actually and partly until today to really normalize and to work down the backlog. So if we look in a lot of the margins, I have to say, we really have super margins in the moment. Very, very high level. And it’s just not right to assume that this is going to stay forever.
I mean if you look in products also like acrylic acid, but also BDO, but then also MDI, TDI, this is all very much on the high level and simply with the effect that in some areas, the supply normalizes. And even the demand stays strong, you just have a certain relaxation of margins. I expect, however, that, even in the second half, this is still a super-margin level. It’s not record margins anymore, but it is very, very good margin. So for that reason, we have to figure into our numbers that there is a certain normalization. And you know how sensitive that is.
I mean in the MDI case, one of the competitors had a force majeure and then immediately prices react. So that is always, let’s say, the joker in the pocket that there could be some unfortunate or unplanned outages, which would change the situation. But overall, I mean, margins levels are so high compared to the last 5, 6 years, that they have to go down to a certain extent. But that should not send you the signal that they are now collapsing on the floor. It’s just really a normalization.
Andreas Heine
Well, I’ll try two, but very brief. In Q3, in Chemicals, if I look to the prices, I can see, I would say, on average, prices might be even higher than in the second quarter. Is there anything I missed if you look on what you see for that particular segment in the current quarter?
Second, in agro, we have seen soft commodity prices being very much up, but no one in the crop protection and seed business could react on this as the season was already running. So now I guess everyone is hoping for price increases, especially for the second half in the Latin American season. Is there anything you can share with us on this price increases for Lat Am in the second half, especially also to offset what you have lost on the currency last year?
Martin Brudermuller
Andreas, the short answer on the Chemicals margins, if you look in some of the margins, they already, at the end of Q2, turned down a little bit. So if you see MDI and TDI in Asia, a couple, Lat Am, more flat and some others also, let’s say, started already to normalize a little bit. That’s why we expect simply with the higher availability that this is going to continue. If I then do the math, I would say the Q3 in average margins are a little bit lower than we had in Q2.
August 2, 2021
Urethane Comments from BASF
BASF SE (BASFY) CEO Martin Brudermuller on Q2 2021 Results – Earnings Call Transcript
Jul. 28, 2021 2:42 PM ETBASF SE (BASFY), BFFAF
BASF SE (OTCQX:BASFY) Q2 2021 Earnings Conference Call July 28, 2021 4:00 AM ET
Company Participants
Stefanie Wettberg – SVP, IR
Martin Brudermuller – Chairman & CEO
Hans Engel – CFO
Martin Brudermuller
Good morning, ladies and gentlemen. Thank you for joining us today. On July 9, BASF released preliminary figures for the second quarter of 2021 and increased the outlook for the full year. Today, we will provide you with further details. Let us begin with the highlights of the second quarter of 2021. The strong growth momentum of the previous 2 quarters has continued. We achieved volume growth and price increases across all regions and all segments compared with the prior year quarter. In some businesses, we were able to restore and, in some cases, increase our margins with the price increases. In others, there’s still some way to go.
EBIT before special items rose by more than €2 billion compared with Q2 2020 and reached €2.4 billion. This is also considerably above the prepandemic level of roughly €1 billion in Q2 2019. Considerably higher earnings in our upstream businesses were the main driver for the strong increase in earnings overall. Compared with Q1 2021, margins in some commodity product lines such as isocyanates slightly declined in Q2 2021 but remain on a high level. In our downstream segments, we managed to increase volumes and prices based on strong demand. However, pressure from increased raw material prices remained high in several downstream businesses.
Let us now turn now on to the macroeconomic data. The indicators for the second quarter are estimates as most of the countries have not yet published their figures. According to the currently available data, global chemical production increased by almost 10% in Q2 2021 compared with the previous year quarter. With an increase in volumes of 28%, BASF Group grew well above global chemical production. All regions recorded strong demand growth. This was most pronounced in Asia, excluding China, and in Europe. In the prior year quarter, these regions as well as North America were significantly impacted by the COVID-19-related lockdowns. And in comparison, chemical production in China had already grown in Q2 2020.
This slide shows our volume growth by region. Sales volumes are compared with volumes in the respective prior year quarters. During the past 3 quarters, we increased volumes in all regions. In Greater China, we recorded double-digit volume growth during the past 5 quarters. In Q2 2021, volume growth in China was less pronounced as the recovery was already in full swing in the second quarter of 2020. Volume growth, however, remains strong at 10%. In Europe and in North America, volumes grew considerably in Q2 2021 as the prior year quarter in these regions has heavily been impacted by the lockdowns due to the pandemic.
We move now on to the volume development by segment. In Q2 2021, we increased volumes in all our segments. The volume increase was strongest in the Surface Technologies and Materials segment. Volumes also grew considerably in the Industrial Solutions, Chemicals and Agricultural Solutions. Overall, volumes increased by 28% or €3.5 billion in absolute terms compared with the prior year quarter.
We now look at our sales development compared with the second quarter of 2020. Sales of BASF Group increased by 56% to €19.8 billion. As already alluded to, considerably higher price in volumes were the driver for this. In total, organic sales growth amounted to 63% in Q2 2021. Currency effects of minus 7% were mainly related to the depreciation of the U.S. dollar. Portfolio measures had a negligible impact on sales.
As I already mentioned, EBIT before special items came in at €2.4 billion. We achieved considerably higher earnings in the Chemicals, Materials, Surface Technologies and Industrial Solutions segment. Further details on the earnings development in these segments can be found in our half year financial report published this morning. In the Nutrition & Care and Agricultural Solutions segment, EBIT before special items declined considerably. I will talk about that on the next slide. Earnings in Others also declined considerably compared with Q2 2020, and this was mainly due to higher additions to provisions for variable compensation components as a result of the strong earnings development.
Laurent Favre
My first question is on that normalization in the upstream, as you said, less than — you still assume that conditions will normalize but just less than before. I was wondering if you could give us a bit more color on the various moving parts there of your assumptions. And in particular, do you see now the risk of further normalization into the first half of 2022? Or do you think that, that scenario is off the table? And if you could separate, I guess, Chemicals and Materials in your comments, that would be great.
And then secondly, Hans, on the ag side, compared to February, when you issued the guidance for slight EBIT growth, there are new moving parts on higher costs and better soft commodities, I guess, currency, if anything, are slightly better. If you net all of those new incrementals, do you think you can grow EBIT slightly in ag for the full year?
Martin Brudermuller
Laurent, then I’ll take the first question. I mean, first of all, let me say that the conditions for Chemicals and Materials segment in the second quarter overall were better than in the first quarter. And that was coming, on one hand, very strong demand because, I mean, in all the different businesses, there is really solid demand globally. There’s also — I think the world has been a little bit surprised by low inventories and then big business, so they have also to fill. And then we have also the supply chain topics. Some of the markets are actually, because also of the supply exchange issues and the shortage of containers, there is not in every business, an arbitrage business from one region to the other.
So partly, they are a little bit more segregated markets, and that’s also why everything reacted quite sensibly in a pattern. And also we have some of our players in the major commodities had supply problems, even coming back to the big freeze in the U.S., which took weeks and actually and partly until today to really normalize and to work down the backlog. So if we look in a lot of the margins, I have to say, we really have super margins in the moment. Very, very high level. And it’s just not right to assume that this is going to stay forever.
I mean if you look in products also like acrylic acid, but also BDO, but then also MDI, TDI, this is all very much on the high level and simply with the effect that in some areas, the supply normalizes. And even the demand stays strong, you just have a certain relaxation of margins. I expect, however, that, even in the second half, this is still a super-margin level. It’s not record margins anymore, but it is very, very good margin. So for that reason, we have to figure into our numbers that there is a certain normalization. And you know how sensitive that is.
I mean in the MDI case, one of the competitors had a force majeure and then immediately prices react. So that is always, let’s say, the joker in the pocket that there could be some unfortunate or unplanned outages, which would change the situation. But overall, I mean, margins levels are so high compared to the last 5, 6 years, that they have to go down to a certain extent. But that should not send you the signal that they are now collapsing on the floor. It’s just really a normalization.
Andreas Heine
Well, I’ll try two, but very brief. In Q3, in Chemicals, if I look to the prices, I can see, I would say, on average, prices might be even higher than in the second quarter. Is there anything I missed if you look on what you see for that particular segment in the current quarter?
Second, in agro, we have seen soft commodity prices being very much up, but no one in the crop protection and seed business could react on this as the season was already running. So now I guess everyone is hoping for price increases, especially for the second half in the Latin American season. Is there anything you can share with us on this price increases for Lat Am in the second half, especially also to offset what you have lost on the currency last year?
Martin Brudermuller
Andreas, the short answer on the Chemicals margins, if you look in some of the margins, they already, at the end of Q2, turned down a little bit. So if you see MDI and TDI in Asia, a couple, Lat Am, more flat and some others also, let’s say, started already to normalize a little bit. That’s why we expect simply with the higher availability that this is going to continue. If I then do the math, I would say the Q3 in average margins are a little bit lower than we had in Q2.
August 2, 2021
Olin Epoxy Comments from Investors’ Call
Hassan Ahmed
Understood. And as a follow-up on the raw material side of things, obviously, we’ve seen higher natural gas prices, as it relates to the Epoxy segment, we’ve seen sort of higher benzene and propylene prices. So you know, as you have given your guidance for the second half of the year, how are you guys thinking about sort of rows? How are you managing those sort of higher prices? And as you’ve given your guidance, if rows do come down, could that be the source of a tailwind above and beyond what you guys have guided to?
Scott Sutton
Yes, I mean, some of those things you mentioned really impact our Epoxy segment quite a lot. So I’ll ask Pat to answer it.
Pat Dawson
Yes, Hassan. I think, first of all, raw material costs, the hydrocarbon cost have really never had a big impact on the Epoxy business. We deal with those pretty easily through our value chain. So I wouldn’t really be, I’m really not concerned about what happens with hydrocarbons, given our ability to pass those costs along and to manage those costs within our system. And of course, we do have options to make versus buy in our key raw materials around things like BPA, phenol and even epichlorohydrin.
Jeff Zekauskas
Thanks very much. How do you see changes in global Epoxy supply and demand, now that prices have elevated? Do you think that it will invite new competitors in or some of your competitors may expand capacity or you think, it will take quite a long time?
Scott Sutton
Thanks, Jeff. I mean, I’ll just start it out. And then Pat will give a little bit of color on maybe some specific areas of demand. But generally, Jeff, I mean demand is superb and improving across multiple segments that Epoxy goes into. Pat, do you want to give a little color?
Pat Dawson
Yes, Jeff. I think if you look at some of the major markets, we have a variety of markets that we sell into, the biggest markets being around industrial and performance coatings. But we also, electronics is very important to us, automotive, and of course, between automotive and electronics, they get intertwined with electrical vehicles, and a lot more printed circuit boards being put into electric vehicles, and that plays to our strength with what we do in electrical laminates in Asia, appliances very strong.
Oil and Gas, we’re seeing oil and gas improving, there’s more demand coming in oil and gas for fusion bonded Epoxy resins. And then I don’t know, Jeff, if you crossed this or not, but the Marine Coatings have been very, pretty much pardon the pun dead in the water for the last, I’d say five years. And shipbuilding, container ships or orders for new container ships in the first five months of this year were nearly double the orders for all of both 2019 and ’20. So this is demand for Epoxy that is yet to be realized, but will come in 2022 and 2023.
Jeff Zekauskas
Okay, I guess my follow-up, there have been so many outages in the United States because of weather in chlorine and caustic, which has tightened supply demand balances. If we don’t have outages to come and the industry gets back up to normal rates of production. Do you think the supply demand balance in chlorine will change in 2022?
Scott Sutton
Yes, I mean, Jeff this is Scott. I mean I guess two points, number one, we’re running our model. And so we control supply and demand characteristics of our business. That’s point one. But even if you fast forward to 2022, ECU demand growth outstrips ECU supply growth, same exact thing in Epoxy and Epichlorohydrin, right. Demand growth far outstrips supply growth. And if you take that to our small-caliber ammunition business, Winchester, you see exactly the same phenomena as well.
Frank Mitsch
Hey, good morning and congrats. Yes, as I look at your Epoxy results in the second quarter, and the guidance for a higher third quarter in a business, I mean, we’re starting to talk about an $800 million EBITDA run rate. I mean is that the sort of neighborhood that we should start thinking about for the Epoxy business?
Scott Sutton
Yes, hey thanks a lot, Frank. I mean, this is Scott, what I’ll say is we’re just not up to our target yet. And so we have some work to do in that business, right. We put a target out there of 30%, which may be at the end of the day get succeeded, but we still have some work to do. So get it to a range.
Josh Silverstein
Thanks. Good morning, guys. Just looking at the EBITDA guidance for next year to be at least up year over year, could you talk about the different business units, what you’re expecting there, I imagined Epoxy is probably moving higher with the margins, but anything that you can kind of break down by the different business units would be helpful?
Scott Sutton
Yes, I mean, we didn’t give, I appreciate the question. But we didn’t give a breakout by business of what’s expected there, but the reality is, I can indirectly answer your question by saying that in each business fundamentals get better and, in each business, we have a specific set of actions that are likely to add value as well.
You’ve heard me just to give examples of it, you’ve heard the team speak to some of those right, we release ourselves from more contractual restrictions and CAPV. We work the Upstream Linchpin product, more in Epoxy. And we’re going after more recreational shooters in our Winchester business by growing the pie, not taking share as well. So you might have a view that is broad based.
Josh Silverstein
Got you. That’s helpful for that. And then just as far as free cash flow deployment for next year, you guys are doing a billion dollars of debt reduction this year. Is there more balance sheet cleanup for next year or can you start to think about stepping up the return of capital profile, using cash for M&A? How are you guys thinking about that billion dollars potentially for next year?
Scott Sutton
No, we have a number of options, we’re thinking about, Todd do you want to give a little bit on that now?
Todd Slater
No problem. I mean if you think about it, where we sit in 2021 today, we’re generating $1.3 billion of levered free cash flow. That’s the cash flow yield of around 18% based on our current stock price. Clearly, we’re going to use about a billion dollars of that to reduce debt. And by reducing debt today, that really frees the balance sheet up to provide flexibility going forward to accomplish those structuring activities, including M&A, and parlaying activities as we’re, the parlaying activities were obviously much more capital light.
Josh Silverstein
Is there any necessary because balance sheet for next year or can you really just redeploy all that billion dollars for those other activities?
Scott Sutton
Yes, I’ll jump in, Todd. And so this is Scott, I mean a part of it will go toward structuring activities, assuming we’re successful at finding some targets that complement our model there, we’ll be exploring some other options as well. There’s not a lot more debt that we necessarily intend to take down. But we’ll be exploring, other ways to get value for shareholders.
Look I mean, at the end of the day, if this phenomenon of multiple compression keeps happening in our stock price, our equity becomes the best return for us. It sits at an 18% return right now.
Arun Viswanathan
Great, thanks for taking my question. Congrats on the results. So yes, I guess first question, just real simply, could you just reiterate or describe the impact of natural gas on your business? There has been some inflation there recently, is there any hedging that we should be aware of or what’s the impact there?
Scott Sutton
Yes, hey Arun, thanks a lot. I mean, yes, we do, Todd, you want to give a little more?
Todd Slater
Yes, sure. Arun, in the near-term, we’re very heavily hedged. So as you’ve heard from us before, about a quarter out, we’re fairly heavily hedged. So we have a high degree of cost certainty, and rolling four quarter basis. So your comment about natural gas, natural gas clearly has caught up lately, you really won’t see unless that is sustained, you will see that in our results over the next year, as our hedges start to roll-off. And back in the deck, we said the dollar changing in gas is worth $50 million of cost.
Arun Viswanathan
Great, thanks. And if I could just ask one more quick one. Have you had any impact from the container shortages globally? Is that something that’s a pressure point now or do you see that not as an issue for you? Thanks.
Scott Sutton
Yes, sure. I mean from a supply chain, there has been some impact that we’ve been able to deal with. The neatest impact is the future impact in Pat’s business of Epoxy where new ships are being built, many new containers to be utilized on these ships, all those things are coated inside and out with Epoxy. So it’s actually a forward positive impact.
Steve Byrne
And then maybe a similar question on the Epoxy business. Have you shifted volumes either more downstream or more upstream? And how does that shift get reflected in your PCI algorithm? I mean, you’re moving some portion of your – of the chlorine side of the ECU into that business, and that business is generating more profit. Is that reflected in your PCI?
Scott Sutton
Yes, so I mean Pat, do you want to give a little color?
Pat Dawson
Yes. I think, first of all, we’ve got a lot of flexibility in this prioritization of value overbuy and within the Epoxy value chain, right. So and we have a lot of flexibility. Obviously, we got a lot of flexibility on our pricing as demonstrated here over the last three months, six months or a year. So, we have a lot of flexibility to do that. And I think on mix, yes, we look across that whole portfolio of Epoxy’s from upstream EPI, and even converting that phenol into BPA, we’ve got options there that we’re discovering.
And then we have a lot of optionality of where we place that EPI molecule, and we monetize it in the form of liquid Epoxy resin, converted resin. We systematize that LER into things like laminates, wind energy. So a lot of flexibility. And then the last part of that mix flexibility is around merchant versus captive. So that’s kind of the way we think of it. It’s a pretty dynamic creative of where we can extract the best value across that whole chain.
Roger Spitz
Thank you so much. My second one is you’re clearly changing the chlorine, caustic, LER pricing paradigm in a very significant way. What is changed for you to be successful? I mean, clearly, it’s your will and drive. But is there any other change in the industry dynamic that is allowing you to turn this paradigm on its head in an extraordinarily positive way? Thank you.
Todd Slater
No, I mean, I wouldn’t say it’s industry dynamic. I would just say that, Olin is controlling its own destiny and changing its own outcome. In other words, we’re the leader in elemental chlorine. We have a contrarian model that we are focused on every day to go get the value. We have a list of clear actions. And we’ve identified elemental chlorine as the number one driver of this company’s overall value evolution. And it is a ratchet and a linchpin because of that, and that’s how we treat it. And when you focus on it that much, you’re going to liberate a lot of value.
August 2, 2021
Olin Epoxy Comments from Investors’ Call
Hassan Ahmed
Understood. And as a follow-up on the raw material side of things, obviously, we’ve seen higher natural gas prices, as it relates to the Epoxy segment, we’ve seen sort of higher benzene and propylene prices. So you know, as you have given your guidance for the second half of the year, how are you guys thinking about sort of rows? How are you managing those sort of higher prices? And as you’ve given your guidance, if rows do come down, could that be the source of a tailwind above and beyond what you guys have guided to?
Scott Sutton
Yes, I mean, some of those things you mentioned really impact our Epoxy segment quite a lot. So I’ll ask Pat to answer it.
Pat Dawson
Yes, Hassan. I think, first of all, raw material costs, the hydrocarbon cost have really never had a big impact on the Epoxy business. We deal with those pretty easily through our value chain. So I wouldn’t really be, I’m really not concerned about what happens with hydrocarbons, given our ability to pass those costs along and to manage those costs within our system. And of course, we do have options to make versus buy in our key raw materials around things like BPA, phenol and even epichlorohydrin.
Jeff Zekauskas
Thanks very much. How do you see changes in global Epoxy supply and demand, now that prices have elevated? Do you think that it will invite new competitors in or some of your competitors may expand capacity or you think, it will take quite a long time?
Scott Sutton
Thanks, Jeff. I mean, I’ll just start it out. And then Pat will give a little bit of color on maybe some specific areas of demand. But generally, Jeff, I mean demand is superb and improving across multiple segments that Epoxy goes into. Pat, do you want to give a little color?
Pat Dawson
Yes, Jeff. I think if you look at some of the major markets, we have a variety of markets that we sell into, the biggest markets being around industrial and performance coatings. But we also, electronics is very important to us, automotive, and of course, between automotive and electronics, they get intertwined with electrical vehicles, and a lot more printed circuit boards being put into electric vehicles, and that plays to our strength with what we do in electrical laminates in Asia, appliances very strong.
Oil and Gas, we’re seeing oil and gas improving, there’s more demand coming in oil and gas for fusion bonded Epoxy resins. And then I don’t know, Jeff, if you crossed this or not, but the Marine Coatings have been very, pretty much pardon the pun dead in the water for the last, I’d say five years. And shipbuilding, container ships or orders for new container ships in the first five months of this year were nearly double the orders for all of both 2019 and ’20. So this is demand for Epoxy that is yet to be realized, but will come in 2022 and 2023.
Jeff Zekauskas
Okay, I guess my follow-up, there have been so many outages in the United States because of weather in chlorine and caustic, which has tightened supply demand balances. If we don’t have outages to come and the industry gets back up to normal rates of production. Do you think the supply demand balance in chlorine will change in 2022?
Scott Sutton
Yes, I mean, Jeff this is Scott. I mean I guess two points, number one, we’re running our model. And so we control supply and demand characteristics of our business. That’s point one. But even if you fast forward to 2022, ECU demand growth outstrips ECU supply growth, same exact thing in Epoxy and Epichlorohydrin, right. Demand growth far outstrips supply growth. And if you take that to our small-caliber ammunition business, Winchester, you see exactly the same phenomena as well.
Frank Mitsch
Hey, good morning and congrats. Yes, as I look at your Epoxy results in the second quarter, and the guidance for a higher third quarter in a business, I mean, we’re starting to talk about an $800 million EBITDA run rate. I mean is that the sort of neighborhood that we should start thinking about for the Epoxy business?
Scott Sutton
Yes, hey thanks a lot, Frank. I mean, this is Scott, what I’ll say is we’re just not up to our target yet. And so we have some work to do in that business, right. We put a target out there of 30%, which may be at the end of the day get succeeded, but we still have some work to do. So get it to a range.
Josh Silverstein
Thanks. Good morning, guys. Just looking at the EBITDA guidance for next year to be at least up year over year, could you talk about the different business units, what you’re expecting there, I imagined Epoxy is probably moving higher with the margins, but anything that you can kind of break down by the different business units would be helpful?
Scott Sutton
Yes, I mean, we didn’t give, I appreciate the question. But we didn’t give a breakout by business of what’s expected there, but the reality is, I can indirectly answer your question by saying that in each business fundamentals get better and, in each business, we have a specific set of actions that are likely to add value as well.
You’ve heard me just to give examples of it, you’ve heard the team speak to some of those right, we release ourselves from more contractual restrictions and CAPV. We work the Upstream Linchpin product, more in Epoxy. And we’re going after more recreational shooters in our Winchester business by growing the pie, not taking share as well. So you might have a view that is broad based.
Josh Silverstein
Got you. That’s helpful for that. And then just as far as free cash flow deployment for next year, you guys are doing a billion dollars of debt reduction this year. Is there more balance sheet cleanup for next year or can you start to think about stepping up the return of capital profile, using cash for M&A? How are you guys thinking about that billion dollars potentially for next year?
Scott Sutton
No, we have a number of options, we’re thinking about, Todd do you want to give a little bit on that now?
Todd Slater
No problem. I mean if you think about it, where we sit in 2021 today, we’re generating $1.3 billion of levered free cash flow. That’s the cash flow yield of around 18% based on our current stock price. Clearly, we’re going to use about a billion dollars of that to reduce debt. And by reducing debt today, that really frees the balance sheet up to provide flexibility going forward to accomplish those structuring activities, including M&A, and parlaying activities as we’re, the parlaying activities were obviously much more capital light.
Josh Silverstein
Is there any necessary because balance sheet for next year or can you really just redeploy all that billion dollars for those other activities?
Scott Sutton
Yes, I’ll jump in, Todd. And so this is Scott, I mean a part of it will go toward structuring activities, assuming we’re successful at finding some targets that complement our model there, we’ll be exploring some other options as well. There’s not a lot more debt that we necessarily intend to take down. But we’ll be exploring, other ways to get value for shareholders.
Look I mean, at the end of the day, if this phenomenon of multiple compression keeps happening in our stock price, our equity becomes the best return for us. It sits at an 18% return right now.
Arun Viswanathan
Great, thanks for taking my question. Congrats on the results. So yes, I guess first question, just real simply, could you just reiterate or describe the impact of natural gas on your business? There has been some inflation there recently, is there any hedging that we should be aware of or what’s the impact there?
Scott Sutton
Yes, hey Arun, thanks a lot. I mean, yes, we do, Todd, you want to give a little more?
Todd Slater
Yes, sure. Arun, in the near-term, we’re very heavily hedged. So as you’ve heard from us before, about a quarter out, we’re fairly heavily hedged. So we have a high degree of cost certainty, and rolling four quarter basis. So your comment about natural gas, natural gas clearly has caught up lately, you really won’t see unless that is sustained, you will see that in our results over the next year, as our hedges start to roll-off. And back in the deck, we said the dollar changing in gas is worth $50 million of cost.
Arun Viswanathan
Great, thanks. And if I could just ask one more quick one. Have you had any impact from the container shortages globally? Is that something that’s a pressure point now or do you see that not as an issue for you? Thanks.
Scott Sutton
Yes, sure. I mean from a supply chain, there has been some impact that we’ve been able to deal with. The neatest impact is the future impact in Pat’s business of Epoxy where new ships are being built, many new containers to be utilized on these ships, all those things are coated inside and out with Epoxy. So it’s actually a forward positive impact.
Steve Byrne
And then maybe a similar question on the Epoxy business. Have you shifted volumes either more downstream or more upstream? And how does that shift get reflected in your PCI algorithm? I mean, you’re moving some portion of your – of the chlorine side of the ECU into that business, and that business is generating more profit. Is that reflected in your PCI?
Scott Sutton
Yes, so I mean Pat, do you want to give a little color?
Pat Dawson
Yes. I think, first of all, we’ve got a lot of flexibility in this prioritization of value overbuy and within the Epoxy value chain, right. So and we have a lot of flexibility. Obviously, we got a lot of flexibility on our pricing as demonstrated here over the last three months, six months or a year. So, we have a lot of flexibility to do that. And I think on mix, yes, we look across that whole portfolio of Epoxy’s from upstream EPI, and even converting that phenol into BPA, we’ve got options there that we’re discovering.
And then we have a lot of optionality of where we place that EPI molecule, and we monetize it in the form of liquid Epoxy resin, converted resin. We systematize that LER into things like laminates, wind energy. So a lot of flexibility. And then the last part of that mix flexibility is around merchant versus captive. So that’s kind of the way we think of it. It’s a pretty dynamic creative of where we can extract the best value across that whole chain.
Roger Spitz
Thank you so much. My second one is you’re clearly changing the chlorine, caustic, LER pricing paradigm in a very significant way. What is changed for you to be successful? I mean, clearly, it’s your will and drive. But is there any other change in the industry dynamic that is allowing you to turn this paradigm on its head in an extraordinarily positive way? Thank you.
Todd Slater
No, I mean, I wouldn’t say it’s industry dynamic. I would just say that, Olin is controlling its own destiny and changing its own outcome. In other words, we’re the leader in elemental chlorine. We have a contrarian model that we are focused on every day to go get the value. We have a list of clear actions. And we’ve identified elemental chlorine as the number one driver of this company’s overall value evolution. And it is a ratchet and a linchpin because of that, and that’s how we treat it. And when you focus on it that much, you’re going to liberate a lot of value.
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