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Epoxy Highlights from Olin Call
August 12, 2024
Olin Corporation (OLN) Q2 2024 Earnings Call Transcript
Jul. 26, 2024 2:37 PM ETOlin Corporation (OLN) Stock
Q2: 2024-07-25 Earnings Summary
EPS of $0.66 misses by $0.03 | Revenue of $1.64B (-3.45% Y/Y) misses by $59.22M
Olin Corporation [OLN] Q2 2024 Earnings Conference Call July 26, 2024 9:00 AM ET
Company Participants
Ken Lane – CEO
Todd Slater – CFO
Steve Keenan – Director, IR
Ken Lane
Thank you, Steve, and good morning, everyone. I want start by saying how grateful we are that despite a direct hit on our Freeport, Texas facility by Hurricane Beryl, all our team members are safe. I’m very proud of how everyone responded. We saw the best come out, with colleagues supporting one another, not only on site during and following the storm, but with each other’s homes as well. Many team members experienced significant damage to their homes, and I want to personally thank all of those who stepped up to help during the recovery. While we did experience damage to some of our assets, Olin’s preparations limited the impact of the storm and kept our team members and neighbors safe.
Turning to our second quarter results, overall, the quarter unfolded as expected, with our chemical businesses improving modestly with seasonal demand gains and generally improved pricing. Winchester also delivered on its second quarter objectives as higher propellant costs were partially offset by improved pricing, continued strength in military, and a strong performance by White Flyer. Looking ahead to the second half, we now have greater clarity around the macroeconomic outlook, customer demand, and global supply. The industrial economic trough we find ourselves in looks to be longer-lived than typical. We expect Hurricane Beryl to represent a setback for our chemicals businesses of approximately $100 million during the third quarter. Based on our current outlook and including the effect of the hurricane, we have lowered our full-year 2024 adjusted EBITDA outlook. Olin remains in great shape with our investment-grade balance sheet, strong liquidity, and leading market positions. We will continue to be disciplined with our capital allocation strategy as we were during the quarter. Also, we remain focused on executing our value-first commercial strategy and continuing to anticipate a bright future as economic activity improves and Olin acts as a coiled spring to serve that recovering demand.
Turning to Slide 4, I’ll highlight our efforts in the second half to maximize cash flow. Our teams will continue to focus on cash generation by reducing capital expenditures in spite of hurricane Beryl requirements, maintaining cost discipline, and reducing working capital through the second half of 2024. We’ve done a lot of restructuring around our chlor alkali and epoxy assets, and expect to continue to realize benefits in the second half. We will continue to stay focused on cost, discipline, and explore additional cost-saving opportunities.
For a look at our epoxy business, let’s turn to Slide 6. Epoxy results continued to improve in the second quarter on lower cost and higher pricing. Third quarter epoxy results will be challenged by both the impact of Hurricane Beryl and our planned start at Germany epoxy resin turnaround. Our US epoxy anti-dumping case continues to progress on schedule, with an expectation for provisional duties to be set later this year. We are encouraged that the European Union recently launched a parallel investigation as we pull all available leavers to level the global playing field and combat the government-subsidized dumping of Florida epoxy. During the second quarter, we’ve seen several US and EU importers accelerate their epoxy import volumes. This raises the potential for retroactive duties to be applied, and we would expect our coalition of US producers to request this additional remedy. Olin has been clear with regulators in both the US and Europe that success on each front will be essential to keeping production of these critical materials in region.
JeffZekauskas
Okay. And in terms of your reassessment of demand for the second half, are there particular industry areas that have slowed relative to your expectations?
Ken Lane
Hey, Jeff, I’ll take that, and this is Ken. So, back in the first half of the year, even in the first quarter, there was a lot of expectation that we were going to start to see the economy improve in the second half of the year. I think that was a consensus pretty much across industries. And we were seeing some inquiries coming in around volume in the second half for our businesses, but as we got closer to that, they just didn’t develop because the economy, frankly, is still struggling to really start to grow again. I wouldn’t say that there’s any significant difference in any one particular industry. There were a couple that we thought there would be some more improvement than what we’ve seen maybe in the TiO2 space, maybe in polyurethanes. Both of those have continued to be stable but have not really shown any growth. So, in Q2, the volume uptick that we saw was more of a normal seasonal uplift. There was really no underlying growth that we saw in the market, which you would expect to see if you were going to see growth in the second half of the year.
Ken Lane
Yes, thanks for the question, Hassan. What I would say is we certainly are in the trough, and if you look at the last 12 months, that would I think certainly represent a trough level of earnings. And what I will say is, I think the expectations are that even if you look at the epoxy business, that is in a very unusual position relative to historic performance. So, that’s not a typical trough level. It’s really driven by the overinvestment that we’ve seen in China with the new capacity, and we know the impacts that that’s having on both Europe and to the US markets, which is why we’ve got the anti-dumping cases out there. So, that’s a bit of an unusual case, but I do think that the trough level of earnings is going to be somewhere around this level. I don’t expect that that it’s going to continue at this level significantly longer. As I said in my prepared comments, this is a very long trough that we’ve been in, and as soon as we start to see the green shoots, not just in the US markets, but also in the China market, we really need to see China start to recover and get the demand in the economy going there. Europe is probably closer to seeing some improvement, but it’s still very, very early, I would say, even in Europe.
Steve Byrne
And then just a quick question on these anti-dumping initiatives in the US and Europe with respect to epoxy, does that require some level of government support in order for those initiatives to get some traction? And what is it that you view as enabling those four countries to undercut you on price on epoxy? It would seem to be propylene and energy-related, but what’s your outlook for that?
Ken Lane
Well, again, our outlook is that we favor fair and free trade. That’s what we want to have. And what we have seen is over the last few years, there have been subsidized assets that are brought online that has created tremendous imbalances, and people are operating in a way that they’re dumping materials into these markets and threatening local production. So, as I said in the prepared remarks, if we don’t see some intervention with import duties to get some protection to the domestic producers, they are very much at risk. And I think these are materials that we want to continue to produce both in Europe and in the United States market. So, we’ll see how this all plays out. We expect to see some announcements around that later this year, and we hope that it’s favorable for the local producers.
Matthew Blair
Good morning. Thanks for taking my question. I’m glad everyone is safe after the hurricane. For that 100 million impact, is there a breakout between the CAPB and epoxy segments? And then I just want to confirm, but it sounds like the $940 million full-year guide actually does include an assumption of better cost of pricing in Q4.
Ken Lane
Yes, thanks for your question, Matthew. The split, if you think about the assets that we’ve talked about, it’s going to be around 70/30 roughly. Don’t make that too precise, but that’s kind of the range you can think about, 70 for chlor alkali, 30 for epoxy. I would use that as a rough estimate. And when we think about the back half of the year, yes, we see that there’s pricing momentum. So, in our outlook, we’ve included some improvement in the caustic market.
Arun Viswanathan
Okay. And well, maybe I can ask the question a little differently then. So, if you do have a resumption in normal operations, given some of the capacity that you’ve taken out, is that – would that be a limitation on your earlier comments maybe a little while ago that peak EBITDA is kind of in the $3 billion range? Maybe, is that now kind of two and a half or well below that? And then along those lines, do you see any kind of structural impairment to any of these markets? I know epoxy has gone through pretty significant pullback, especially in China, in demand. It’s unlikely that China will return to their prior growth rates. So, I don’t know if they’ve taken enough action to right-size their own epoxy market either. So, it seems like that business does have some structural limitations that weren’t there in the past. And then on chlor alkali, again, you’ve shut down some capacity. So, just wanted to understand if there’s been any change in kind of the earnings power of the businesses.
Ken Lane
Yes, well, listen, I said in the prepared comments as well that we’ve positioned ourselves very well with a set of assets that are going to be competitive in the long term. They’re very well positioned on the cost curve. We’re continuously looking at optimizing our asset portfolio, especially around chlor alkali, but our focus is going to be on operating those assets. As we see demand coming back, we will adjust our position in the market to be the ones that are capturing that growth. I mean, that’s really the way we’ve positioned ourselves. So, if you think about the capacity we took offline, it doesn’t take away the optionality for us to be that coiled spring as we’ve called it, to be able to respond when we see the growth coming back. With respect to epoxy, yes, structurally there are more challenges in that market. And that’s why, again, we’ve been so vocal about the anti-dumping cases that we have filed. We think that it’s very important that there is some support that comes into those markets. But ultimately, there probably does need to be some restructuring in the China market. There’s probably going to need to be some capacity that comes offline because to your point, it’s going to be a very long time before they’re able to grow into that capacity. And when you’ve seen these sorts of troughs in the past, that’s what’s happened. You’ve seen capacity come off in conjunction with growth in the market, and both of those things will typically correct themselves over time, but it’s going to be years, if not months before we see that happen.
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