Epoxy
May 4, 2021
Epoxy Comments from Huntsman Investors Call
Huntsman Corp (HUN) Q1 2021 Earnings Call Transcript
HUN earnings call for the period ending March 31, 2021.
Peter Huntsman — Chairman, President & Chief Executive Officer
Let’s turn to slide number four. The Performance Products segment reported adjusted EBITDA of $63 million compared to $58 million in last year’s first quarter. We saw growth in our Asia business and strong demand and margins for most of our division’s products. This combined with lower fixed costs, more than offset the approximate $14 million of headwind that resulted in winter storm Yuri.
Total volumes for the division declined 3% due largely to the storm and due to the recent discontinuation of certain tolling arrangements associated with the chemical intermediates business that we sold this past year. On a pro forma basis, we estimate that our underlying volumes were actually up 6% year-over-year, leading the way with strong demand in our performance amines portfolio, largely in our sustainability related products, such as amines that are sold in new VOC-free polyurethane catalysts and into the wind market.
Growth in the construction markets have also benefited our amines that go into coatings and adhesives as well as the maleic anhydride business that serves the UPR markets. Volumes increased 6% year-over-year within our maleic anhydride business. Raw material costs have been rising, but we’ve been successful in passing through price increases to offset higher costs. We believe that some of the lost sales in the first quarter due to the winter storm will be captured in the second quarter. This combined with some of the seasonal strength and improved margins, should translate into EBITDA growth in the second quarter over the first quarter of about 5% to 10% for Performance Products.
Let’s turn to slide number five. Our Advanced Materials business reported adjusted EBITDA of $44 million, down 8% versus the prior year. The first quarter last year still experienced solid aerospace results before the global pandemic started significantly impacting the commercial aerospace industry.
As a result, our aerospace sales were down approximately 40% year-over-year. It’s the primary reason that our adjusted EBITDA declined year-over-year. As we previously stated, we believe our aerospace business bottomed in the fourth quarter of 2020. While we still anticipate full recovery to pre-pandemic levels will take at least a couple of years, we did see a sequential improvement in our aerospace sales, and we are encouraged that recovery is a bit better than we had anticipated.
When excluding aerospace, the underlying volumes of our other core specialty businesses experienced growth year-over-year from improved trends, as well as positive contribution from our recent acquisition of CDC Thermostat Specialties and Gabriel Performance Products. Our non-aerospace business, EBITDA grew 8.5% over last year. While our non-aerospace EBITDA, including our recent acquisitions and divestitures, grew at 28%. The integration of both acquisitions remain on track and we’re confident that we will achieve the run rate synergies that we communicated at the time each respective transaction was announced. We believe that overall fundamental demand is improving in our core businesses.
Looking toward the second half of 2021, with improving fundamentals, as well as contributions from the recent acquisitions, we expect adjusted EBITDA for our advanced materials division to be about 10% better than the first quarter.
Sean Douglas — Executive Vice President & Chief Financial Officer
Thank you, Peter. Turning now to slide seven. We were pleased to see a continuation of a strong recovery in the first quarter of 2021. The adjusted EBITDA increased by $124 million year-over-year and by $49 million quarter-over-quarter. This is in spite of approximately $25 million of negative impact to EBITDA in the first quarter of this year from winter storm Yuri that slam the Gulf Coast in February. The overall decrease in volumes year-over-year is primarily attributed to our aerospace business where sales in the prior year period were strong before the pandemic.
As Peter has commented, aerospace revenues were down approximately 40% versus the prior year. However, they have bottomed, and we saw a meaningful improvement in the first quarter this year versus the fourth quarter of the prior year. Variable margins significantly improved year-over-year and quarter-over-quarter as demand for products has steadily improved and increases in our sales prices have exceeded increases in our raw material prices, allowing overall adjusted EBITDA margins to recover to mid-teens.
Turning to slide 8. Regarding synergies from recent acquisitions, we have now exceeded the $20 million target we set, facilitated by combining our polyurethane spray foam businesses and creating our Huntsman Building Solutions platform. With respect to the CVC Thermoset acquisition, we estimate having already achieved a current annualized run rate of approximately $9 million of synergies and are on target to achieve $15 million near the end of 2021. We are also on target to achieve the Gabriel synergies of $8 million by early 2023.
John Roberts — UBS — Analyst
Thank you. Best wishes as well, Sean. We hear another company in the epoxy market is targeting 30% EBITDA margins. Do you think Huntsman has a better or worse mix than the competition? And any thoughts on that kind of target?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think our mix is far, far better than the competition, but I’m slightly biased in saying that. So without knowing who you’re talking about or anything, look, if we’re able to-if we’re able earn it, we’re going to earn it. And I think we’ve got a great batch of customers and so forth.
I think that, again, we are probably a bit different than our competition and the amount of volume that we’re moving into the aerospace industry. That might seem like a bit of a frustrating position for us to be in right now.
But I think over the past decade and over the decade to come, that position is going to serve us extremely well. It’s been a very reliable earner for us and with margins that are on the high end of our spectrum of customers we have globally.
So I think that in an area like epoxies, I really don’t compare us with our competition because we really don’t compete a great deal with the more widely recognized epoxy producers around the world. I think our biggest competitors we have in that business really are smaller blenders and formulators that are downstream. And those are the people that we probably are competing more aggressively against.
So again, I don’t-I say that tongue and cheek about us being far superior than our competition. I really just don’t see us competing head to head with a lot of them.
David Begleiter — Deutsche Bank — Analyst
Thank you. Peter, just on aerospace, with that market beginning to bottom return as we speak, do you think you could still get back the entire, I think, roughly $80 million of EBITDA loss last year? Or could you even do maybe better going forward?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think we’ll do better going forward. We’ve got — I think that the idea that you’re going to be producing planes five, 10 years from now with the aluminum content that you had a couple of years back.
I just-I don’t know it’s going to happen. I think when you look at the next-generation 320 Airbus, the wing of the next-generation 777X, the Boeing 787 and so forth, if anything, these are going to be having more carbon composite materials on a per plane basis.
I’d also note that with the recent acquisition of the CBC Specialty Polymers Group, we’ve-there’s additional exposure there, been a bit frustrating for us this year. But longer term, that additional exposure into the aerospace business is going to be significant. It’s going to be something that we’re going to be continuing to guard right now and make sure that we’re nurturing it, but carrying forward now because I think longer term. It’s going to add to what would otherwise be a normalized EBITDA in the aerospace industry.
May 4, 2021
Epoxy Comments from Huntsman Investors Call
Huntsman Corp (HUN) Q1 2021 Earnings Call Transcript
HUN earnings call for the period ending March 31, 2021.
Peter Huntsman — Chairman, President & Chief Executive Officer
Let’s turn to slide number four. The Performance Products segment reported adjusted EBITDA of $63 million compared to $58 million in last year’s first quarter. We saw growth in our Asia business and strong demand and margins for most of our division’s products. This combined with lower fixed costs, more than offset the approximate $14 million of headwind that resulted in winter storm Yuri.
Total volumes for the division declined 3% due largely to the storm and due to the recent discontinuation of certain tolling arrangements associated with the chemical intermediates business that we sold this past year. On a pro forma basis, we estimate that our underlying volumes were actually up 6% year-over-year, leading the way with strong demand in our performance amines portfolio, largely in our sustainability related products, such as amines that are sold in new VOC-free polyurethane catalysts and into the wind market.
Growth in the construction markets have also benefited our amines that go into coatings and adhesives as well as the maleic anhydride business that serves the UPR markets. Volumes increased 6% year-over-year within our maleic anhydride business. Raw material costs have been rising, but we’ve been successful in passing through price increases to offset higher costs. We believe that some of the lost sales in the first quarter due to the winter storm will be captured in the second quarter. This combined with some of the seasonal strength and improved margins, should translate into EBITDA growth in the second quarter over the first quarter of about 5% to 10% for Performance Products.
Let’s turn to slide number five. Our Advanced Materials business reported adjusted EBITDA of $44 million, down 8% versus the prior year. The first quarter last year still experienced solid aerospace results before the global pandemic started significantly impacting the commercial aerospace industry.
As a result, our aerospace sales were down approximately 40% year-over-year. It’s the primary reason that our adjusted EBITDA declined year-over-year. As we previously stated, we believe our aerospace business bottomed in the fourth quarter of 2020. While we still anticipate full recovery to pre-pandemic levels will take at least a couple of years, we did see a sequential improvement in our aerospace sales, and we are encouraged that recovery is a bit better than we had anticipated.
When excluding aerospace, the underlying volumes of our other core specialty businesses experienced growth year-over-year from improved trends, as well as positive contribution from our recent acquisition of CDC Thermostat Specialties and Gabriel Performance Products. Our non-aerospace business, EBITDA grew 8.5% over last year. While our non-aerospace EBITDA, including our recent acquisitions and divestitures, grew at 28%. The integration of both acquisitions remain on track and we’re confident that we will achieve the run rate synergies that we communicated at the time each respective transaction was announced. We believe that overall fundamental demand is improving in our core businesses.
Looking toward the second half of 2021, with improving fundamentals, as well as contributions from the recent acquisitions, we expect adjusted EBITDA for our advanced materials division to be about 10% better than the first quarter.
Sean Douglas — Executive Vice President & Chief Financial Officer
Thank you, Peter. Turning now to slide seven. We were pleased to see a continuation of a strong recovery in the first quarter of 2021. The adjusted EBITDA increased by $124 million year-over-year and by $49 million quarter-over-quarter. This is in spite of approximately $25 million of negative impact to EBITDA in the first quarter of this year from winter storm Yuri that slam the Gulf Coast in February. The overall decrease in volumes year-over-year is primarily attributed to our aerospace business where sales in the prior year period were strong before the pandemic.
As Peter has commented, aerospace revenues were down approximately 40% versus the prior year. However, they have bottomed, and we saw a meaningful improvement in the first quarter this year versus the fourth quarter of the prior year. Variable margins significantly improved year-over-year and quarter-over-quarter as demand for products has steadily improved and increases in our sales prices have exceeded increases in our raw material prices, allowing overall adjusted EBITDA margins to recover to mid-teens.
Turning to slide 8. Regarding synergies from recent acquisitions, we have now exceeded the $20 million target we set, facilitated by combining our polyurethane spray foam businesses and creating our Huntsman Building Solutions platform. With respect to the CVC Thermoset acquisition, we estimate having already achieved a current annualized run rate of approximately $9 million of synergies and are on target to achieve $15 million near the end of 2021. We are also on target to achieve the Gabriel synergies of $8 million by early 2023.
John Roberts — UBS — Analyst
Thank you. Best wishes as well, Sean. We hear another company in the epoxy market is targeting 30% EBITDA margins. Do you think Huntsman has a better or worse mix than the competition? And any thoughts on that kind of target?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think our mix is far, far better than the competition, but I’m slightly biased in saying that. So without knowing who you’re talking about or anything, look, if we’re able to-if we’re able earn it, we’re going to earn it. And I think we’ve got a great batch of customers and so forth.
I think that, again, we are probably a bit different than our competition and the amount of volume that we’re moving into the aerospace industry. That might seem like a bit of a frustrating position for us to be in right now.
But I think over the past decade and over the decade to come, that position is going to serve us extremely well. It’s been a very reliable earner for us and with margins that are on the high end of our spectrum of customers we have globally.
So I think that in an area like epoxies, I really don’t compare us with our competition because we really don’t compete a great deal with the more widely recognized epoxy producers around the world. I think our biggest competitors we have in that business really are smaller blenders and formulators that are downstream. And those are the people that we probably are competing more aggressively against.
So again, I don’t-I say that tongue and cheek about us being far superior than our competition. I really just don’t see us competing head to head with a lot of them.
David Begleiter — Deutsche Bank — Analyst
Thank you. Peter, just on aerospace, with that market beginning to bottom return as we speak, do you think you could still get back the entire, I think, roughly $80 million of EBITDA loss last year? Or could you even do maybe better going forward?
Peter Huntsman — Chairman, President & Chief Executive Officer
Well, I think we’ll do better going forward. We’ve got — I think that the idea that you’re going to be producing planes five, 10 years from now with the aluminum content that you had a couple of years back.
I just-I don’t know it’s going to happen. I think when you look at the next-generation 320 Airbus, the wing of the next-generation 777X, the Boeing 787 and so forth, if anything, these are going to be having more carbon composite materials on a per plane basis.
I’d also note that with the recent acquisition of the CBC Specialty Polymers Group, we’ve-there’s additional exposure there, been a bit frustrating for us this year. But longer term, that additional exposure into the aerospace business is going to be significant. It’s going to be something that we’re going to be continuing to guard right now and make sure that we’re nurturing it, but carrying forward now because I think longer term. It’s going to add to what would otherwise be a normalized EBITDA in the aerospace industry.
May 4, 2021
Epoxy Comments from Olin Investors Call
Scott Sutton
Yes. Thanks, Steve, and hello to everyone. Look, I’m super proud of the Olin team for their passion, results and for their optimism for our future. Because of their optimism and success, I had the opportunity to pull forward our value creation formula story. First of all, Olin is on track to deliver more than $1.8 billion of adjusted EBITDA this year. One proof point to that track is that second quarter adjusted EBITDA is expected to exceed first quarter adjusted EBITDA, excluding Uri onetime impacts, even though we have significant turnarounds in the second quarter. The third quarter adjusted EBITDA should also exceed the second quarter. So it is time to start projecting toward a higher adjusted EBITDA of $2.5 billion and above in future years, the emphasis really being on the above. For clarity, 2022 is expected to be a positive stepping stone toward that direction. Some key activities to bridge that gap to $2.5 billion are shown on Slide number 4. But maybe Slide number 5 tells a more comprehensive story to that $2.5 billion and above.
Olin is quickly moving through four phases of evolution. We have already discussed the first two with you on prior earnings calls, and we are currently in Phase 2, the leading phase as we enhance our unique model of optimizing value first across the whole ECU. Think of leading as solving the ECU co-production conundrum by setting our participation to the weak side of the ECU, anticipating potential value inflection points and then activating to achieve a desired response. Shortly, we’ll be looking to take our innovative model and apply it across multiple millions of tons of similar molecules and parlay the model into a much larger business. All kinds of commercial strategies will be employed in this Phase 2 of parlaying including bartering, sophisticated trading and differentiated alliances to better serve customers. Simultaneously, Olin will be preparing for Phase 4, structuring as we look to take proceeds from our cash flow machine and invest them in a smart way to expand our beneficial footprint. Please don’t miss our internal equity price target in the lower corner of that slide.
Okay. Let me pull back to today a bit and fill in some key activities and results. Slide number 6 shows that in the first quarter, we matched our market participation to the weak side of the ECU.
In other words, we sold less caustic, which not only allowed us to hold up caustic value relative to the fourth quarter but more importantly, allowed us to significantly expand value throughout our chlorine and chlorine derivatives chain. I think the lift in the ECU PCI shown on Slide number 7 clearly shows the positive results. That value impact was also significantly expanded by the innovative actions taken by our epoxy team, as shown on Slide number 8. Olin is the world’s leader in epoxy and our wins continue to stack up as we place our offering with key customers and into key applications. Look, I would also like to highlight the updates made to our Olin ESG scorecard in the appendix slides. We are generally delivering to many of the commitments made in our sustainability report that we still have a lot of work to get fully on track here. Again, this demonstrates the team’s comprehensive passion for Olin’s broader contribution.
So before opening this call up to Q&A, let me wrap it all up into contemporary value on Slide number 9. Our team’s shared success in leading and running toward parlaying is forecasted to generate roughly $1.1 billion of levered free cash flow this year, which at the current stock price represents a yield of roughly 16%, really attractive, considering we’re just in the early stages of our push for shareholder value delivery.
Alex Yefremov
Scott, you were talking about epoxy margins moving towards 30% in the medium to long term. If margins are this high, I assume part of this equation is the price. How do you think competitors and industry in general would respond to this? What level of reinvestment economics are we in this position ad you just see more capacity amount?
Scott Sutton
I’ll turn it over to Pat here in just a moment. We probably won’t go into the competitor action there. But I would just start Pat’s comments by saying that we actually have a long way to go to get to that 30% adjusted EBITDA, but it’s totally within our scope and range. So Pat?
Pat Dawson
Alex, I would say why not 30% because I think if you look at the performance properties of epoxy and the fact that there’s really not any clear substitutes for epoxy in terms of its performance and the value that it brings to customers, it should be able to command these kind of returns. I think also, you look at our leadership position and the space that we occupy, vis-a-vis competitors that’s more of an upstream, midstream space and the way we can monetize our Epicor hydrant in the form of liquid epoxy resin, I think those leadership positions are very strong. I think also, we have a number of opportunities to parlay that you see on Slide 8. That upstream position into opportunities that, quite frankly, are already in motion, whether we have the option to toll produce, the option to make versus buy, the option to produce more if we can get the value for that. I think we have a lot of optionality there. So that’s the way we look at it. And we’re really working to accelerate those parlaying activities as we move early into the game here towards that 30%.
Alex Yefremov
And just as a follow-up, Scott, you mentioned you expect third quarter EBITDA to continue improving sequentially. We had a lot of disruptions in the US Gulf Coast, as you well know. How do you expect ECU PCI to behave in the back half? Do you think we’ll start coming down at some point in the third to fourth quarter from Q2 level?
Scott Sutton
Well, I mean, I would say our improved EBITDA performance is going to be a reflection of an improved ECU PCI as well. But what I would say, there are going to be points in our future that perhaps we exist through a quarter where we have to make some adjustments in how we’re set up as we’re running our model and that can lead to potential declines in the ECU PCI. But they’re going to be short lived because what they do is position us for the next phase of growth that we have in that ECU PCI and in our EBITDA.
Kevin McCarthy
Scott, as I listen to the commentary and having read the slides, it seems to me that when we hear about alliances tolling agreements, bartering, et cetera, that you’re going to be looking for, what I would call, capital light solutions to growth as opposed to building, let’s say, new greenfield or brownfield capacity. Is that correct or am I overreading into the signals here?
Scott Sutton
No, I mean, that’s correct. I mean, we do have a next path to growth that is capital light. And in fact, we are already engaging in those activities. You heard when Pat had answered an earlier question that we’re doing things why tolling some of our shares upstream materials into liquid epoxy resin, for example, so that we can service our customer base. And there’s just a lot of opportunities to do that across our complete portfolio. So those are the things that we can pull forward the fastest to support growth. There’s other things we can do beyond that. I don’t really see greenfield expansion as part of our future. There could be limited brownfield expansion, depending on the alliance opportunity that we might have. But yes, it’s a low capital near term growth strategy that will complement with that Phase 4 structure.
Matthew Blair
And then I was hoping you could share any more details on just other chlorine derivatives that were especially strong in the quarter other than EDC, which has some pretty pretty transparent pricing. On our sources, it looks like HCL pricing was up more than 100% quarter-over-quarter. But could you just offer any more commentary on what you’re seeing on that chlorine envelope?
Scott Sutton
Well, I mean that chlorine envelope is most of our company. So I’m going to let Damian make a comment or two on something and then, Pat, might want to add on to as epoxy comments being a key chlorine derivative for us?
Damian Gumpel
Matt, I’ll refer you to a couple of slides. I’ll refer you to Slide 17. The appendix showing our heat map and then refer you to a slide also at the back, Slide 21. And both of those, when you put those together, you see pretty widespread interest in Olin, chlorine and chlorine derivative for very broad spectrum of end uses, you see a continued momentum and request from customers for Olin’s ability to supply. I’ll go back to the Scott’s comments, or questions at the beginning, he, about are we seeing things — question around maybe market share. I will just tell you that our customer forecasts are still for volume throughout the rest of the year that are higher than our forecasted ability to supply them. So that should give you an indication as to the robustness of the chlorine side, which of course, as going to my earlier comments, is still relatively stronger than the caustic side. So we’ll continue to manage the ECU around that. But across [CCO], ACL, bleach versus chlorine, it’s all those three legs in the heat map. And I’ll pass it over to you, Pat.
Pat Dawson
Matthew, I’d say from a epoxy standpoint, we do sell some of our upstream products into wastewater treatment and municipalities for water treatment. We’ve seen that really continue to improve on demand. And some from an epoxy and resin standpoint, you look at civil engineering, construction, automotive, even though there’s been semi chip shortage, we’ve seen improvement coming back there. Appliances, electronics, we’re starting to see maybe a little bit of life again, and oil and gas, which uses fusion bonded epoxy for pipelines and everything like that, machinery is coated with epoxy. So I think it’s back to what Scott said, we’ve seen good month over month improvement. But we think we’re still very much in the early innings of this demand recovery. We think there’s more coming based on some of these end use markets I just mentioned.
Eric Petrie
And then maybe a question for Pat. How much epoxy goes into higher value versus the low margin end markets, where do you want to get that down to? And then is there a difference in profitability between regions currently?
Pat Dawson
I think, if you look on Slide 8, we talk about where we’re increasing our supply and the high margin performance coatings, I mentioned civil engineering earlier, formulated type systems. And certainly that value over volume orientation that we have is putting more into those types of areas and applications. And there’s places where you have low margins in industrial coatings, wind energy, it’s been an area that’s been growing but we’ve pulled back from some of the low end of that business. And then some of our upstream base stocks, we’re definitely doing less business here because the value is not there. I think geographically speaking, one of our leadership advantages that we have is we have a lot of flexibility as to how we flex product between the regions. And that’s a pretty dynamic process that we use all the time around our activation. So I wouldn’t say anyone geographies, I don’t pay attention to that so much strategically as I do where the opportunities come up to create more value to juice up our return to the ECU.
Steve Byrne
With respect to this 30% EBITDA target in epoxy and the shifts more downstream and less of the upstream commodity sales. Do you have the commercial relationships in those downstream resins and/or the production capacity to move more of the feedstock material into those downstream products or will this require some acquisitions?
Pat Dawson
First of all, let me just course correct you here a little bit. Really, our sweet spot is in the up and the midstream part of the epoxy value chain. We don’t go nearly as far down in that chain as to say the questions that you were asking. We certainly have all the right channels to market in place today to monetize and to really exert our leadership in up and midstream. So I would just say just a little correction in how we view that chain and where our strengths are.
Steve Byrne
So you can get to 30% EBITDA margins by selling epi and cumene and BPA and so forth and not move downstream?
Pat Dawson
No, Steve, that’s — again, part of the equation is the strength and you have upstream, but that midstream, we have many channels as to how we monetize the epichlorohydrin and the bisphenol A. So that’s where we have a lot of channels, a lot of optionality, a lot of optionality to parlay. So that’s pretty broad reaching as you move down into that midstream.
Steve Byrne
And then just curious about the margin on epi. If you look about your broad platform of chlorine containing derivatives, where would you put epi in the ranking of all of those chlorine containing products? I mean if you look at the margin difference between your two segments, I’m just curious where that epi would fall in the ranking.
Pat Dawson
I don’t think we’re going to get into the rankings of epi versus derivatives of where we put that epi. Epi, make no mistake, is a strategic pillar to our upstream and it’s a strategic pillar as to how we parlay down through the midstream into those various end use markets where we’re prioritizing our value over volume. And I think the other thing to keep in mind, Steve, is when we had our investors presentation back in February 19th, one of the headlines on my slides read that epi and LER supply demand projected to be tight by 2021. And so we’re just entering this phase of what we’ve been saying for the last two years of what we saw coming in this sweet spot of ours around this up in the midstream and parlaying these things that we talked about on Slide 8. So I think those kind of fundamentals bode well for our ability to get to this 30% EBITDA in epoxy.
Angel Castillo
And then on the epoxy margins, you noted that you expect them to improve sequentially in the second quarter. I was just curious, does that contemplate, I guess, the meaningful pickup in benzene prices? And/or as you think about where raw materials are moving, how should we think about that within your guidance?
Todd Slater
We feel very confident in the fact that we’ve had good pricing momentum. We’ve seen that pricing momentum continue here in April. There’s publicly announced increases out there for May that are also getting good traction. So we feel very good about the sequential improvement in our margins and the sequential improvement in improved returns to the ECU.
May 4, 2021
Epoxy Comments from Olin Investors Call
Scott Sutton
Yes. Thanks, Steve, and hello to everyone. Look, I’m super proud of the Olin team for their passion, results and for their optimism for our future. Because of their optimism and success, I had the opportunity to pull forward our value creation formula story. First of all, Olin is on track to deliver more than $1.8 billion of adjusted EBITDA this year. One proof point to that track is that second quarter adjusted EBITDA is expected to exceed first quarter adjusted EBITDA, excluding Uri onetime impacts, even though we have significant turnarounds in the second quarter. The third quarter adjusted EBITDA should also exceed the second quarter. So it is time to start projecting toward a higher adjusted EBITDA of $2.5 billion and above in future years, the emphasis really being on the above. For clarity, 2022 is expected to be a positive stepping stone toward that direction. Some key activities to bridge that gap to $2.5 billion are shown on Slide number 4. But maybe Slide number 5 tells a more comprehensive story to that $2.5 billion and above.
Olin is quickly moving through four phases of evolution. We have already discussed the first two with you on prior earnings calls, and we are currently in Phase 2, the leading phase as we enhance our unique model of optimizing value first across the whole ECU. Think of leading as solving the ECU co-production conundrum by setting our participation to the weak side of the ECU, anticipating potential value inflection points and then activating to achieve a desired response. Shortly, we’ll be looking to take our innovative model and apply it across multiple millions of tons of similar molecules and parlay the model into a much larger business. All kinds of commercial strategies will be employed in this Phase 2 of parlaying including bartering, sophisticated trading and differentiated alliances to better serve customers. Simultaneously, Olin will be preparing for Phase 4, structuring as we look to take proceeds from our cash flow machine and invest them in a smart way to expand our beneficial footprint. Please don’t miss our internal equity price target in the lower corner of that slide.
Okay. Let me pull back to today a bit and fill in some key activities and results. Slide number 6 shows that in the first quarter, we matched our market participation to the weak side of the ECU.
In other words, we sold less caustic, which not only allowed us to hold up caustic value relative to the fourth quarter but more importantly, allowed us to significantly expand value throughout our chlorine and chlorine derivatives chain. I think the lift in the ECU PCI shown on Slide number 7 clearly shows the positive results. That value impact was also significantly expanded by the innovative actions taken by our epoxy team, as shown on Slide number 8. Olin is the world’s leader in epoxy and our wins continue to stack up as we place our offering with key customers and into key applications. Look, I would also like to highlight the updates made to our Olin ESG scorecard in the appendix slides. We are generally delivering to many of the commitments made in our sustainability report that we still have a lot of work to get fully on track here. Again, this demonstrates the team’s comprehensive passion for Olin’s broader contribution.
So before opening this call up to Q&A, let me wrap it all up into contemporary value on Slide number 9. Our team’s shared success in leading and running toward parlaying is forecasted to generate roughly $1.1 billion of levered free cash flow this year, which at the current stock price represents a yield of roughly 16%, really attractive, considering we’re just in the early stages of our push for shareholder value delivery.
Alex Yefremov
Scott, you were talking about epoxy margins moving towards 30% in the medium to long term. If margins are this high, I assume part of this equation is the price. How do you think competitors and industry in general would respond to this? What level of reinvestment economics are we in this position ad you just see more capacity amount?
Scott Sutton
I’ll turn it over to Pat here in just a moment. We probably won’t go into the competitor action there. But I would just start Pat’s comments by saying that we actually have a long way to go to get to that 30% adjusted EBITDA, but it’s totally within our scope and range. So Pat?
Pat Dawson
Alex, I would say why not 30% because I think if you look at the performance properties of epoxy and the fact that there’s really not any clear substitutes for epoxy in terms of its performance and the value that it brings to customers, it should be able to command these kind of returns. I think also, you look at our leadership position and the space that we occupy, vis-a-vis competitors that’s more of an upstream, midstream space and the way we can monetize our Epicor hydrant in the form of liquid epoxy resin, I think those leadership positions are very strong. I think also, we have a number of opportunities to parlay that you see on Slide 8. That upstream position into opportunities that, quite frankly, are already in motion, whether we have the option to toll produce, the option to make versus buy, the option to produce more if we can get the value for that. I think we have a lot of optionality there. So that’s the way we look at it. And we’re really working to accelerate those parlaying activities as we move early into the game here towards that 30%.
Alex Yefremov
And just as a follow-up, Scott, you mentioned you expect third quarter EBITDA to continue improving sequentially. We had a lot of disruptions in the US Gulf Coast, as you well know. How do you expect ECU PCI to behave in the back half? Do you think we’ll start coming down at some point in the third to fourth quarter from Q2 level?
Scott Sutton
Well, I mean, I would say our improved EBITDA performance is going to be a reflection of an improved ECU PCI as well. But what I would say, there are going to be points in our future that perhaps we exist through a quarter where we have to make some adjustments in how we’re set up as we’re running our model and that can lead to potential declines in the ECU PCI. But they’re going to be short lived because what they do is position us for the next phase of growth that we have in that ECU PCI and in our EBITDA.
Kevin McCarthy
Scott, as I listen to the commentary and having read the slides, it seems to me that when we hear about alliances tolling agreements, bartering, et cetera, that you’re going to be looking for, what I would call, capital light solutions to growth as opposed to building, let’s say, new greenfield or brownfield capacity. Is that correct or am I overreading into the signals here?
Scott Sutton
No, I mean, that’s correct. I mean, we do have a next path to growth that is capital light. And in fact, we are already engaging in those activities. You heard when Pat had answered an earlier question that we’re doing things why tolling some of our shares upstream materials into liquid epoxy resin, for example, so that we can service our customer base. And there’s just a lot of opportunities to do that across our complete portfolio. So those are the things that we can pull forward the fastest to support growth. There’s other things we can do beyond that. I don’t really see greenfield expansion as part of our future. There could be limited brownfield expansion, depending on the alliance opportunity that we might have. But yes, it’s a low capital near term growth strategy that will complement with that Phase 4 structure.
Matthew Blair
And then I was hoping you could share any more details on just other chlorine derivatives that were especially strong in the quarter other than EDC, which has some pretty pretty transparent pricing. On our sources, it looks like HCL pricing was up more than 100% quarter-over-quarter. But could you just offer any more commentary on what you’re seeing on that chlorine envelope?
Scott Sutton
Well, I mean that chlorine envelope is most of our company. So I’m going to let Damian make a comment or two on something and then, Pat, might want to add on to as epoxy comments being a key chlorine derivative for us?
Damian Gumpel
Matt, I’ll refer you to a couple of slides. I’ll refer you to Slide 17. The appendix showing our heat map and then refer you to a slide also at the back, Slide 21. And both of those, when you put those together, you see pretty widespread interest in Olin, chlorine and chlorine derivative for very broad spectrum of end uses, you see a continued momentum and request from customers for Olin’s ability to supply. I’ll go back to the Scott’s comments, or questions at the beginning, he, about are we seeing things — question around maybe market share. I will just tell you that our customer forecasts are still for volume throughout the rest of the year that are higher than our forecasted ability to supply them. So that should give you an indication as to the robustness of the chlorine side, which of course, as going to my earlier comments, is still relatively stronger than the caustic side. So we’ll continue to manage the ECU around that. But across [CCO], ACL, bleach versus chlorine, it’s all those three legs in the heat map. And I’ll pass it over to you, Pat.
Pat Dawson
Matthew, I’d say from a epoxy standpoint, we do sell some of our upstream products into wastewater treatment and municipalities for water treatment. We’ve seen that really continue to improve on demand. And some from an epoxy and resin standpoint, you look at civil engineering, construction, automotive, even though there’s been semi chip shortage, we’ve seen improvement coming back there. Appliances, electronics, we’re starting to see maybe a little bit of life again, and oil and gas, which uses fusion bonded epoxy for pipelines and everything like that, machinery is coated with epoxy. So I think it’s back to what Scott said, we’ve seen good month over month improvement. But we think we’re still very much in the early innings of this demand recovery. We think there’s more coming based on some of these end use markets I just mentioned.
Eric Petrie
And then maybe a question for Pat. How much epoxy goes into higher value versus the low margin end markets, where do you want to get that down to? And then is there a difference in profitability between regions currently?
Pat Dawson
I think, if you look on Slide 8, we talk about where we’re increasing our supply and the high margin performance coatings, I mentioned civil engineering earlier, formulated type systems. And certainly that value over volume orientation that we have is putting more into those types of areas and applications. And there’s places where you have low margins in industrial coatings, wind energy, it’s been an area that’s been growing but we’ve pulled back from some of the low end of that business. And then some of our upstream base stocks, we’re definitely doing less business here because the value is not there. I think geographically speaking, one of our leadership advantages that we have is we have a lot of flexibility as to how we flex product between the regions. And that’s a pretty dynamic process that we use all the time around our activation. So I wouldn’t say anyone geographies, I don’t pay attention to that so much strategically as I do where the opportunities come up to create more value to juice up our return to the ECU.
Steve Byrne
With respect to this 30% EBITDA target in epoxy and the shifts more downstream and less of the upstream commodity sales. Do you have the commercial relationships in those downstream resins and/or the production capacity to move more of the feedstock material into those downstream products or will this require some acquisitions?
Pat Dawson
First of all, let me just course correct you here a little bit. Really, our sweet spot is in the up and the midstream part of the epoxy value chain. We don’t go nearly as far down in that chain as to say the questions that you were asking. We certainly have all the right channels to market in place today to monetize and to really exert our leadership in up and midstream. So I would just say just a little correction in how we view that chain and where our strengths are.
Steve Byrne
So you can get to 30% EBITDA margins by selling epi and cumene and BPA and so forth and not move downstream?
Pat Dawson
No, Steve, that’s — again, part of the equation is the strength and you have upstream, but that midstream, we have many channels as to how we monetize the epichlorohydrin and the bisphenol A. So that’s where we have a lot of channels, a lot of optionality, a lot of optionality to parlay. So that’s pretty broad reaching as you move down into that midstream.
Steve Byrne
And then just curious about the margin on epi. If you look about your broad platform of chlorine containing derivatives, where would you put epi in the ranking of all of those chlorine containing products? I mean if you look at the margin difference between your two segments, I’m just curious where that epi would fall in the ranking.
Pat Dawson
I don’t think we’re going to get into the rankings of epi versus derivatives of where we put that epi. Epi, make no mistake, is a strategic pillar to our upstream and it’s a strategic pillar as to how we parlay down through the midstream into those various end use markets where we’re prioritizing our value over volume. And I think the other thing to keep in mind, Steve, is when we had our investors presentation back in February 19th, one of the headlines on my slides read that epi and LER supply demand projected to be tight by 2021. And so we’re just entering this phase of what we’ve been saying for the last two years of what we saw coming in this sweet spot of ours around this up in the midstream and parlaying these things that we talked about on Slide 8. So I think those kind of fundamentals bode well for our ability to get to this 30% EBITDA in epoxy.
Angel Castillo
And then on the epoxy margins, you noted that you expect them to improve sequentially in the second quarter. I was just curious, does that contemplate, I guess, the meaningful pickup in benzene prices? And/or as you think about where raw materials are moving, how should we think about that within your guidance?
Todd Slater
We feel very confident in the fact that we’ve had good pricing momentum. We’ve seen that pricing momentum continue here in April. There’s publicly announced increases out there for May that are also getting good traction. So we feel very good about the sequential improvement in our margins and the sequential improvement in improved returns to the ECU.
May 2, 2021
Driver Shortage
$70,000 For A Part-Time Driver
by Tyler DurdenSunday, May 02, 2021 – 05:00 PM
By John Kingston of Freightwaves,
David Parker is the CEO of Covenant Logisticsand he was blunt with analysts who follow the company on its earnings call Tuesday.
“How do we get enough drivers?” he said in response to a question from Stephens analyst Jack Atkins. “I don’t know.”
Parker then gave an overview of the situation facing Covenant, and by extension other companies, in trying to recruit drivers. One problem: With rates so high, companies are encountering the fact that a driver doesn’t need to work a full schedule to pull in a decent salary.
“We’re finding out that just to get a driver, let’s say the numbers are $85,000 (per year),” Parker said, according to a transcript of the earnings call supplied by SeekingAlpha. “But a lot of these drivers are happy at $70,000. Now they’re not coming to work for me, unless it’s in the ($80,000s), because they’re happy making $70,000.”
What’s happening, he said, is that drivers are looking at the fact that they can make $70,000 “and stay home a little more.”
The result is a tightening of capacity. Parker said utilization in the first quarter at Covenant was three or four percentage points less than it would have as a result of that development. “It’s an interesting dynamic that none of us have calculated,” he said.
To put the numbers in perspective, Todd Amen, the president of ATBS, which prepares taxes for mostly independent owner-operators, said in a recent interview with the FreightWaves Drilling Deep podcast that the average tax return his company prepared for drivers’ 2020 pay was $67,500. He also said his company prepared numerous 2020 returns with pay in excess of $100,000.
Parker was firm that this was not a situation likely to change soon. “There’s nothing out there that tells me that drivers are going to readily be available over the medium [term in] one to two years,” he said. “And that’s where I’m at.”
Paul Bunn, the company’s COO and senior executive vice president, echoed what other executives have said recently: Additional stimulus benefits are making the situation tighter. He said that while offering some hope that as the benefits roll off, “that might help a bit.”
But what the government giveth the government can sometimes taketh away. Bunn expressed another familiar sentiment in the industry today, that an infrastructure bill adding to demand for workers would create more difficulty to put drivers behind the wheel. Construction, Bunn said, is “a monster competitor of our industry” and if the bill is approved, “that’s going to be a big pull.”
Labor is going to be a “capacity constraint” through the economy, Bunn said, while conceding that trucking is not unique in that. And because of that labor squeeze, capacity in many fields is going to be limited. “The OEMs, the manufacturers are limited capacity,” Bunn said. “They’re not ramping up in a major, major way because of labor, because of commodity pricing, because of the costs.”
All that means is that capacity growth is going to be “reasonable,” Bunn said. “It’s not going to be crazy, people growing fleets [by] significant amounts.”
“It’s all you can do just to hold serve,” he added.
While the driver situation is tough, it didn’t notably hurt the first-quarter performance of Covenant. To open the call, Joey Hogan, Covenant’s co-president, highlighted some of the company’s first-quarter numbers: a 6% growth in operating revenue on a strategic reduction in the number of company tractors and the best first-quarter net income figure in its history.
Beyond the market for drivers, Parker said the freight market is “hot” and likely to stay that way.
“We are at 7%, 8% GDP growth, that goes to 5%, well, probably, or it could stay 7% or 8%,” he said. “But it’s still going to be numbers that you and I have never sensed or felt from a freight standpoint. And so I don’t see that letting up, I see that a solid couple of years of being in that kind of environment.”
Given that, Parker and other Covenant managers used the occasion of the earnings call to drive home with more detail a point the company made in its earnings statement a day earlier: It intends to get higher rates out of some of its Dedicated customers. While the company’s Expedited division saw its operating ratio improve to 91% from 102.3% a year earlier, the Dedicated division saw its OR remain above 100%.
The Dedicated division, Bunn said, has two types of customers. One is a group with high returns, “and we want more of those,” he said. “We’re going to go to the customers [where] we have that and say, ‘Can we have more of your business?’”
The other are customers that Bunn referred to as “commoditized.” Those customers are going to need to “value” the Dedicated service provides “or we’re going to give those trucks to somebody who’s in the first bucket.”
Trucks won’t just get “yanked” out, Bunn said. But “we’re not going to run Dedicated with a 98, 99 or 100 OR,” he added.
But even though Covenant, like other carriers, has leverage in negotiations given the tight market for capacity, it does need to be handled with a certain degree of aplomb, Hogan said. Hogan was talking about the company’s Expedited division when he said that in price negotiations, a company needs to be “respectful” as prices get up to “that line where they say, ‘Well, I’m going to grow my own [transportation].’”
Another possibility: rail. “When does the price push them to the rail?” he asked.
However, the Expedited division is “in a good spot for at least a couple of years,” Hogan said. That’s aided by the fact that inventories are “stupid low” across the supply chain, he added.
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