Epoxy
August 4, 2021
Port of LA Update
In the eye of the congestion storm: Q&A with Port of LA’s Gene Seroka
Southern California gateway still clogged as wave of peak-season cargo looms
Greg Miller, Senior Editor Follow on Twitter Tuesday, August 3, 2021 6 minutes read
Peak season, for all practical purposes, is here. There are once again 25 or more container ships at anchor in San Pedro Bay off the ports of Los Angeles and Long Beach. Rail lines UP and BNSF were so backed up that they recently throttled container flows from Southern California to Chicago.
With no end in sight, how can West Coast ports handle the ongoing flood of imports?
To answer that question, American Shipper interviewed Gene Seroka, executive director of the Port of Los Angeles, on Wednesday. Following is an edited version of that conversion:
AMERICAN SHIPPER: There’s a parade of ships now headed from Asia to California. With peak season cargo coming in and new trans-Pacific services and extra loaders, is there any way for Los Angeles to squeeze out more productivity on the land side and dig out of this? Or does normalcy have to wait for imports to abate?
SEROKA: “The railroads are full. The warehouses are full. Port terminals are full. Ships are coming in and waiting to get worked. The factories are behind in orders. This incredible demand has got everybody in the entire value chain just clipping out at levels we never could have imagined — and it’s still not enough.
“We’ve still got so much cargo coming in. We were on the phone with a big retailer this morning and they said that they’re still going to need another year to get inventories up to a level they think is appropriate.
“Something’s got to ease. We’ve got 23 vessels scheduled to come into both ports over the next three days. That’s pretty high. We’ve now got 25 ships at anchor for both ports, 17 of which are directed to LA.
“But, for example, if we suddenly got a break in the warehouse system and a bunch of cargo was pushed out after being put in 53-foot boxes, we could have an immediate release valve on these terminals. One overnight run of 60,000 containers makes us look very, very different tomorrow than we do right now.”
AMERICAN SHIPPER: There have been several times when the number of ships at anchor dropped by 10 or more over a single weekend. Is that part of the strategy?
SEROKA: “Yes, it has been preprogrammed and planned. One of the things that’s difficult is getting the trucker community aligned with those additional gates and work times. Because these guys and ladies have the 11-hour federal mandate of work plus extra rest time. So, we’ve got to be in real synchronicity with these folks to say, ‘Hey, look, we’re going to be able to move a ton of cargo out on Saturday, Saturday night, Sunday, Sunday night. Can you have the power available?’ And they may forgo a little bit of work on Thursday and Friday, for example.”
AMERICAN SHIPPER: You just mentioned warehouses as a possible release valve. You’re implying more can be done at warehouses productivity-wise?
SEROKA: “Absolutely. It works on either end. If ships slow down for a week coming in, we could push out some of this cargo. There would be a little bit of a flow issue to direct the trucks and trains, but at least it would put a dent into the anchorages. Conversely, a similar outcome — maybe even with faster results — would be at the warehouses. You’ve got 2 billion square feet of space. If you were suddenly able to push out 53-foot domestic boxes at an abnormal pace — because these guys are only open from 8 to 5 — but if you added night shifts and weekend shifts, we could really release the air out of these terminals and get this port in better shape to welcome that next vessel.”
AMERICAN SHIPPER: There has been a shortage of job applicants across the country, in many different industries. How much is this a factor, not just in the warehouses, but across the entire land-based logistics system?
SEROKA: “I’ll break it down into three areas. The ILWU [longshore union] rank and file has been on the job between five and a half and six days a week since the pandemic began. We’ve added about 1,000 longshoremen and women during this process and it could be more. The employers and the union have to agree on those numbers within the collective-bargaining agreement, but if we can get more workers out there, even better in my view.
“On the trucking side, we’ve got about 18,000 truckers registered individually to do business at this port, only half of which call at the port at least once a week. With these terminals super-full with containers, that slows down truck times. Because we’re not getting four turns a day, we’re only getting two, we need more drivers and you still have half the population you can recruit into this business. How quickly individual companies and independent contractors want to [resume work at the port] remains the question.
“On the third segment, the warehousing guys, that’s been hit or miss all throughout COVID. You’ve got physical distancing and the teams that work in warehouses are now smaller and working farther apart. With stimulus, some may have forgone working in warehouses because those checks took care of the needs of them and their families. Now bringing them back are things like rent abatements and eviction moratoriums and unemployment benefits starting to wane and expire. So, you may see more people in the [warehouse labor] market.”
AMERICAN SHIPPER: There have also been huge challenges on the rail side. You reported in mid-June that Los Angeles’ on-dock rail time was still 12 days, not far from its peak earlier in the year. Then, in July, UP suspended Southern California-Chicago service for a week and BNSF rationed service for two weeks. How has that affected the port?
SEROKA: “That was a very difficult decision — pausing trains from Los Angeles/Long Beach to Chicago — and I think it had to be done. I talk to the senior guys and ladies at both companies, regularly, if not daily. What I learned from UP was that at the time that decision was made, they had 25 miles worth of trains sitting outside of Joliet. Lo and behold, very shortly thereafter, BNSF had 22 miles of trains sitting outside that facility.
“They are facing some of the same difficulties that we do here in LA. Their dwell time for containers, once a train gets discharged, was three times as long as it used to be, pre-pandemic, pre-surge. The expectation is that their customers come in within the day and pick up their boxes. It was going to three-plus days. And their on-the-street dwell time [at warehouses] was up to eight days, very similar to ours. So, they’re not getting equipment back nearly fast enough. Their normal model is about two days’ street dwell.
“These guys were saying, ‘How many more trains can I put in there because the guys in Southern California are screaming we need more rail cars, engine power and crews to get the next ship’s cargoes out. If [equipment] is just sitting in Chicago or other locations, I can’t get those assets and crews back.’ [Pausing service] was a painful decision they had to make.
“Combined, about 15% of our cargo was paused for that point in time. So, it didn’t decimate us, but every container that doesn’t move out of the port creates more of a clog right here. We’re once again sitting at about 95-98% of our land usage capacity and 80% is considered full-throttle for us.”
AMERICAN SHIPPER: How has this emergency pause in service affected rail dwell time at the port?
SEROKA: “For the small snapshot in time that they went into this pause, it increased dwell times, as you could imagine, because you’ve got containers that are not moving out. So, right now, we’re sitting at 13.1 days rail dwell and that’s just off the peak that we witnessed back in February. But then we will see it slide as these Midwest trains start to be built and move out.
“What it did was help clear out Joliet to an extent where it’s now manageable [in terms of] the cargo they can put through their terminal — and that will accelerate trains moving out of here going to Chicago.”
AMERICAN SHIPPER: Looking at all that’s happened already in 2021 — from the rail situation to the anchorages and all the other issues — it has really been an incredible year.
SEROKA: “And the story still has not been finished yet.”
August 4, 2021
Port of LA Update
In the eye of the congestion storm: Q&A with Port of LA’s Gene Seroka
Southern California gateway still clogged as wave of peak-season cargo looms
Greg Miller, Senior Editor Follow on Twitter Tuesday, August 3, 2021 6 minutes read
Peak season, for all practical purposes, is here. There are once again 25 or more container ships at anchor in San Pedro Bay off the ports of Los Angeles and Long Beach. Rail lines UP and BNSF were so backed up that they recently throttled container flows from Southern California to Chicago.
With no end in sight, how can West Coast ports handle the ongoing flood of imports?
To answer that question, American Shipper interviewed Gene Seroka, executive director of the Port of Los Angeles, on Wednesday. Following is an edited version of that conversion:
AMERICAN SHIPPER: There’s a parade of ships now headed from Asia to California. With peak season cargo coming in and new trans-Pacific services and extra loaders, is there any way for Los Angeles to squeeze out more productivity on the land side and dig out of this? Or does normalcy have to wait for imports to abate?
SEROKA: “The railroads are full. The warehouses are full. Port terminals are full. Ships are coming in and waiting to get worked. The factories are behind in orders. This incredible demand has got everybody in the entire value chain just clipping out at levels we never could have imagined — and it’s still not enough.
“We’ve still got so much cargo coming in. We were on the phone with a big retailer this morning and they said that they’re still going to need another year to get inventories up to a level they think is appropriate.
“Something’s got to ease. We’ve got 23 vessels scheduled to come into both ports over the next three days. That’s pretty high. We’ve now got 25 ships at anchor for both ports, 17 of which are directed to LA.
“But, for example, if we suddenly got a break in the warehouse system and a bunch of cargo was pushed out after being put in 53-foot boxes, we could have an immediate release valve on these terminals. One overnight run of 60,000 containers makes us look very, very different tomorrow than we do right now.”
AMERICAN SHIPPER: There have been several times when the number of ships at anchor dropped by 10 or more over a single weekend. Is that part of the strategy?
SEROKA: “Yes, it has been preprogrammed and planned. One of the things that’s difficult is getting the trucker community aligned with those additional gates and work times. Because these guys and ladies have the 11-hour federal mandate of work plus extra rest time. So, we’ve got to be in real synchronicity with these folks to say, ‘Hey, look, we’re going to be able to move a ton of cargo out on Saturday, Saturday night, Sunday, Sunday night. Can you have the power available?’ And they may forgo a little bit of work on Thursday and Friday, for example.”
AMERICAN SHIPPER: You just mentioned warehouses as a possible release valve. You’re implying more can be done at warehouses productivity-wise?
SEROKA: “Absolutely. It works on either end. If ships slow down for a week coming in, we could push out some of this cargo. There would be a little bit of a flow issue to direct the trucks and trains, but at least it would put a dent into the anchorages. Conversely, a similar outcome — maybe even with faster results — would be at the warehouses. You’ve got 2 billion square feet of space. If you were suddenly able to push out 53-foot domestic boxes at an abnormal pace — because these guys are only open from 8 to 5 — but if you added night shifts and weekend shifts, we could really release the air out of these terminals and get this port in better shape to welcome that next vessel.”
AMERICAN SHIPPER: There has been a shortage of job applicants across the country, in many different industries. How much is this a factor, not just in the warehouses, but across the entire land-based logistics system?
SEROKA: “I’ll break it down into three areas. The ILWU [longshore union] rank and file has been on the job between five and a half and six days a week since the pandemic began. We’ve added about 1,000 longshoremen and women during this process and it could be more. The employers and the union have to agree on those numbers within the collective-bargaining agreement, but if we can get more workers out there, even better in my view.
“On the trucking side, we’ve got about 18,000 truckers registered individually to do business at this port, only half of which call at the port at least once a week. With these terminals super-full with containers, that slows down truck times. Because we’re not getting four turns a day, we’re only getting two, we need more drivers and you still have half the population you can recruit into this business. How quickly individual companies and independent contractors want to [resume work at the port] remains the question.
“On the third segment, the warehousing guys, that’s been hit or miss all throughout COVID. You’ve got physical distancing and the teams that work in warehouses are now smaller and working farther apart. With stimulus, some may have forgone working in warehouses because those checks took care of the needs of them and their families. Now bringing them back are things like rent abatements and eviction moratoriums and unemployment benefits starting to wane and expire. So, you may see more people in the [warehouse labor] market.”
AMERICAN SHIPPER: There have also been huge challenges on the rail side. You reported in mid-June that Los Angeles’ on-dock rail time was still 12 days, not far from its peak earlier in the year. Then, in July, UP suspended Southern California-Chicago service for a week and BNSF rationed service for two weeks. How has that affected the port?
SEROKA: “That was a very difficult decision — pausing trains from Los Angeles/Long Beach to Chicago — and I think it had to be done. I talk to the senior guys and ladies at both companies, regularly, if not daily. What I learned from UP was that at the time that decision was made, they had 25 miles worth of trains sitting outside of Joliet. Lo and behold, very shortly thereafter, BNSF had 22 miles of trains sitting outside that facility.
“They are facing some of the same difficulties that we do here in LA. Their dwell time for containers, once a train gets discharged, was three times as long as it used to be, pre-pandemic, pre-surge. The expectation is that their customers come in within the day and pick up their boxes. It was going to three-plus days. And their on-the-street dwell time [at warehouses] was up to eight days, very similar to ours. So, they’re not getting equipment back nearly fast enough. Their normal model is about two days’ street dwell.
“These guys were saying, ‘How many more trains can I put in there because the guys in Southern California are screaming we need more rail cars, engine power and crews to get the next ship’s cargoes out. If [equipment] is just sitting in Chicago or other locations, I can’t get those assets and crews back.’ [Pausing service] was a painful decision they had to make.
“Combined, about 15% of our cargo was paused for that point in time. So, it didn’t decimate us, but every container that doesn’t move out of the port creates more of a clog right here. We’re once again sitting at about 95-98% of our land usage capacity and 80% is considered full-throttle for us.”
AMERICAN SHIPPER: How has this emergency pause in service affected rail dwell time at the port?
SEROKA: “For the small snapshot in time that they went into this pause, it increased dwell times, as you could imagine, because you’ve got containers that are not moving out. So, right now, we’re sitting at 13.1 days rail dwell and that’s just off the peak that we witnessed back in February. But then we will see it slide as these Midwest trains start to be built and move out.
“What it did was help clear out Joliet to an extent where it’s now manageable [in terms of] the cargo they can put through their terminal — and that will accelerate trains moving out of here going to Chicago.”
AMERICAN SHIPPER: Looking at all that’s happened already in 2021 — from the rail situation to the anchorages and all the other issues — it has really been an incredible year.
SEROKA: “And the story still has not been finished yet.”
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.
August 2, 2021
Epoxy Comments from Huntsman
Huntsman Corporation (HUN) CEO Peter Huntsman on Q2 2021 Results – Earnings Call Transcript
Jul. 30, 2021 4:31 PM ETHuntsman Corporation (HUN)3 Comments
Q2: 2021-07-30 Earnings Summary
EPS of $0.86 beats by $0.05 | Revenue of $2.02B (62.31% Y/Y) beats by $162.34M
Huntsman Corporation (NYSE:HUN) Q2 2021 Earnings Conference Call July 30, 2021 10:00 AM ET
Company Participants
Ivan Marcuse – Vice President, Investor Relations
Peter Huntsman – Chairman, President & Chief Executive Officer
Phil Lister – Executive Vice President & Chief Financial Officer
Tony Hankins – President, Polyurethanes
Peter Huntsman
Let’s turn to slide number 5. Advanced Materials reported adjusted EBITDA of $58 million in the quarter, a significant improvement year-over-year driven primarily by the continuing recovery of our core industrial businesses and improving contributions from our recent acquisitions.
Excluding the acquisition of Gabriel Performance Products, sales revenue in Advanced Materials increased to 42% compared to the second quarter of 2020 generating adjusted EBITDA margins of 19%.
Aerospace results were flat in the quarter versus the prior year. Although, we saw another quarter of sequential improvement, which we expect to see again in the third quarter. We still think a full recovery to pre-pandemic levels in this segment will take another year or two given our exposure to the wide-body planes used more in international travel, but we’re encouraged that the recovery is tracking better than we had anticipated earlier this year.
Excluding aerospace sales in our other core specialty businesses experienced growth year-over-year and are now slightly above 2019 levels. Additionally, the integration of CVC Thermoset Specialties and Gabriel Performance Products continues on plan. We remain confident that we will achieve the total run rate synergies of $23 million we communicated at the time each of these respective transactions were announced.
Overall our Advanced Materials division is tracking well and our aerospace — and as aerospace recovers we expect this position to consistently generate adjusted EBITDA margins in excess of 20%.
We will continue to grow this division organically and through targeted bolt-on acquisitions. Third quarter adjusted EBITDA for Advanced Materials should look similar quarter-over-quarter subject to typical seasonality and be between $50 million and $55 million.
Our Advanced Materials division has gone through a meaningful change this past year, as we’ve purchased and integrated our recent acquisitions of CVC and Gabriel. We’ll see further cost optimization and commercial synergies in excess of $13 million by 2023 building upon the $10 million we will achieve this year. We will also see the return of our aerospace business that will further enhance our EBITDA by an additional $40 million to $50 million that is fully recovered. Our Textile Effects business will not only see the continued recovery of its retail customer base, but the completion of our Bangladeshi expansion that will deliver $10 million annually. In short, in the coming quarters the groundwork is being laid for over $150 million of additional EBITDA that will take place across our businesses. Aside from aerospace this assumes no further recovery in the market. Additionally, we have a very strong balance sheet that affords us to aggressively pursue M&A opportunities. This will be done where we have true synergies growth opportunities and the ability to stabilize our earnings.
Having said that, I am surprised at some of the multiples that have been seen in some of the recent transactions in this industry. As I have said before, we will be disciplined. The quality of our earnings will continue to be of paramount importance. This past quarter notwithstanding when we experienced a perfect storm of third-party outages unplanned inventory build and associated lost sales most of which will be recovered in the second half of this year, we are confident of our ability to deliver greater than 25% free cash flow to EBITDA this year. Should present market conditions prevail, we will see this percentage of free cash flow to EBITDA increase to 40% this next year.
Alex Yefremov
Thank you, and good morning, everyone. Peter, do you expect typical seasonality in the fourth quarter in polyurethanes and Advanced Materials, or given the trends you just discussed could we see maybe flat Q4 versus Q3?
Peter Huntsman
Yes, I do see seasonality. I mean, there will be the typical closures. Every year for some reason we have this phenomenon called Thanksgiving and Christmas, the New Year’s that seemingly slow things down. And yeah, we will see that. I do think that to offset – my only point in saying that, I’m optimistic on the fourth quarter is I think that some of that seasonality will be offset by possible – possible supply shortages, and price increases. And if those things happen then you’ll see some of that seasonality will be muted. But yeah, there will be a slowdown in demand, and that’s just something that will happen.
Everchem Updates Archive 
Sign Up for Email Updates