Epoxy Highlights from Olin’s Investors Call
Olin Corporation (OLN) CEO Scott Sutton on Q3 2021 Results – Earnings Call Transcript
Oct. 22, 2021 1:06 PM ETOlin Corporation (OLN)
Q3: 2021-10-21 Earnings Summary
EPS of $2.40 beats by $0.42 | Revenue of $2.34B (62.78% Y/Y) misses by $36.32M
Olin Corporation (NYSE:OLN) Q3 2021 Earnings Conference Call October 22, 2021 9:00 AM ET
Steve Keenan – Director of Investor Relations
Scott Sutton – Chairman, President and Chief Executive Officer
Pat Dawson – Executive Vice President and President, Epoxy and International
Yes. Thanks, Steve, and hello to everybody. I’m pleased to report the Olin team has once again proved to be the most unique and agile in the industry in meeting the clear expectation of our shareholders. Again, I just have to say that the solid performance by the complete team sets me up to be able to focus on the items that drive our future, which are enhancing our contrarian value model, turning our ratchet on undervalued products, parlaying to grow, accretive capital allocation, building out our interlink matrix of activation knobs, growing shooting sports participation and lifting all Olin people. This is a company that is focused on continuing to grow adjusted EBITDA and coupling that with balanced capital management to deliver more than $10 of earnings per share in the near future.
So I’ll make some brief commentary on a few slides and get to the Q&A quickly. 2021 is expected to be a solid result for Olin for the reasons shown on Slide #3. While the longer-term fundamental of demand that grows faster than supply is starting to be exposed here in 2021, our leading actions to get a higher value for our scarce resources is proving to be successful. Current highlights of that success are that we continue to exit business that was based on non-negotiated pricing, align our product chain mix with the intended impact from purposeful settings of our interlinked matrix of activation nodes, start accelerating the value capture of epichlorohydrin and driving expansion in shooting sports participation with our Shoot United movement. While there may be some end of year holiday slowdowns, which are really supply driven, not demand-driven, and some seasonality that result in a sequentially flattish fourth quarter result, we still expect 2022 to exceed 2021. The reason thematic for better results in 2022 is shown on Slide # 4.
The minor reason in our thematic is that the previously mentioned demand growth versus supply growth dynamic just gets better and better across all our businesses. More people are enjoying shooting sports, demanding clean wind energy and expanding their home stats. The major reason in our thematic is that all of Olin’s activities are designed around a foundational, cultural principle of only selling into value. We know who we are.
In October, we took the decision to close some more undervalued assets and simultaneously used other existing global asset and product liquidity to grow Olin’s value. As our own ECU assets are getting rightsized, we are a global buyer of ECUs to satisfy our higher-value products demand. Even though we have grown earnings for 5 consecutive quarters and delivered a levered free cash flow that is approaching 20%, we still must show that our performance will continue to improve. But maybe more importantly, we must demonstrate our ability to manage uncertainty and volatility.
Slide #5 is an illustration. Olin has 3 substantial businesses, each with a meaningful contribution to segment earnings. For reasons that we previously discussed, the Winchester, which is shown in red on the slide, consumer and defense business offers solid and sustainable growth. For reasons we will discuss in just a moment, the Epoxy, which is shown in green on the slide, engineered materials offer differentiated growth as we expand margins in that business. The Chlor Alkali Products and Vinyls Industrial Essentials are our largest organic and inorganic growth opportunity. We expect the Chlor Alkali segment results to be slightly volatile across a brief transitional window when we have a model profile shift between the relative strengths on the 2 sides of the ECU. We think of the net company volatility as ripples on a deep ocean, not waves on a shallow lagoon. We should control our destiny here.
Continuing with the theme of good fundamentals on Slide #6, our perceived old world chemistry has new world application and value. I won’t read all these megatrend multipliers as I’m sure they’re familiar to you, but instead jump to Slide #7 and hit on the differentiated growth profile of epoxy. Epoxy sets itself apart from other engineered materials by offering nearly non-substitutable performance. Almost every end-use category is growing faster than global GDP. Consider the outlook for more and larger wind turbines for clean energy, consider the outlook for electrical laminates for the new mobility trends and broad electrification trends, consider the outlook for infrastructure expansion and replacement and so on. Even though we recognized the value of this business in epoxy resin sales and in epoxy systems sales, the value driver is really epichlorohydrin. And we will be expounding on our globally leading epichlorohydrin position in future earnings calls. We expect it won’t be long before our Epoxy business delivers greater than $1 billion of EBITDA and carries the same enterprise value that all of Olin carries today, more representative of a highly engineered materials company.
Scott, I wanted to touch on some of these natural gas price escalations that we’ve seen, not just in the U.S. but globally as well. So on the U.S. side of it, if you could sort of talk through how you guys have dealt in what was a pretty tricky quarter and continues to be a tricky 4Q in terms of the hikes we’ve seen in natural gas prices? And if you could also talk about what you guys are seeing in terms of cost curve impact with natural gas price escalation in Europe and the power curtailments we’re seeing in China as well?
Yes. I mean, sure. For us, we have a couple strategies to manage the local issue. I mean, 1 is, we have a pretty strong hedging program, where we have some amount of it hedged out into the future, which helps protect those. The rest of it is absolutely 100% covered in product pricing. And every day, we get more ability to recover that on an instantaneous basis as we get out of some of these contracts that keep us in handcuffs. I think the more important 1 is maybe your second one, I mean rising global energy costs, it’s actually a plus for Olin and that’s because trade flows get more expensive and trade movements get more volatile. And that just fits right into our model of lifting the value of these Olin scarce resources.
Scott, you mentioned epi renegotiations in the slides. Can you provide any details what percent of your merchant business is out for renegotiations but also maybe size up the merchant epi business as a percent of revenue or percent of your capacity?
Yes. So I think I heard your question. I mean, at least on the chlorine side, we continue to make progress getting that opened up. And we expect at least by 2023, that that’s essentially opened up. But we’ll have to see how discussions go over the next quarter for us. We haven’t really shared just how big our epi business is in relation to the rest of it because it’s not that important, the size of the epi business. What is important is that it is the linchpin that sets value across our whole epoxy chain. And Olin is focused every day on lifting the value of that scarce resource. Pat, would you have anything else to add about epichlorohydrin?
Yes. I think the other thing to keep in mind about epi is, we have a lot of flexibility between the merchant market and our captive production. We have multiple knobs on epi that we can activate to bring more value to that whole epoxy value chain.
It seems like The Dow contract is still 1 of the largest opportunities going forward. Does that contract all open up at once? Or does it open up in phases over time? And if it’s the latter, could you talk about how far out the longest part of that contract goes?
Well, I won’t give too many specifics on arrangements with a particular supplier or customer. But what I will say, because it’s in the public domain already, and it is a material item is that our major ECU supply that we’re doing at cost ends in 2025. And so there’ll be options and each and every option will be cash accretive to Olin.
Could you discuss parlaying activity for EDC as well? What is involved here? And how would you describe this opportunity?
Yes. Yes. I mean Damian will make some comments on parlaying of EDC. Just on the broader topic, I would just say we’re continuing to be successful developing that program. And if you think about many of our products, chlorine, caustic, bleach, EDC, epoxy and epichlorohydrin, in the third quarter, we had success at parlaying activities around all those.
Scott, you’ve talked about in Epoxy segment margin goal of 30% in the past and this morning, I think you threw out $1 billion as an EBITDA goal for the segment. What do you need to do in that business to get there from here? What are the 2 or 3 sources of incremental improvement, recognizing that the business has already come a long way? What additional runway do you see in ’22 and beyond for upside in Epoxy?
Yes. I mean we just need to keep the activities going that we’ve already started. But Pat can expand on those a little bit.
Yes. Kevin, Epoxy, I would say, is really it’s — Epoxy is at the right time, at the right place. And what I mean by that is if you look at the megatrends and you look at the demand for Epoxy in these different segments, right place, right time, right? So you look at composites and light-weighting. Epoxy enables that. You look at blend, wind systems, decarbonization right place, right time, electrical laminates, e-mobility, adhesives that are used in e-batteries, Epoxy, right place, right time. So I think what you’re seeing is we’ve got the infrastructure in place. We’ve got the commercial organization in place. And really, we can go across the whole globe around these applications, extracting value where we see value can best be extracted. But Kevin, I think we’re in a great position to be able to complement what we have already been doing and to keep building value around a lot of these megatrends that play right in the wheelhouse of how Epoxy brings value to the market.
Okay. So it sounds like it’s less strategic and more just riding the sources of demand improvement that you outlined, Pat.
Well, I’d say strategically, make no mistake that epichlorohydrin and the scarcity of epichlorohydrin and the multiple knobs we have there is much more strategic going forward than it has been in the past. And I would say that we even have opportunities in aromatics in what we do in phenol and acetone and cumene to bring this contrarian model into play. So that could be very strategic to our future as well.
Yes. You have this slide that illustrates the relative value between chlorine and caustic. And I appreciate the concept that your business is still complex. It’s clear that, that chlorine value is not a data point on here, but likely a very wide range. Epi, for example, perhaps a year ago might have been at the bottom end of that range and value to you of chlorine. Is it fair to say that it is now among the highest value end markets for chlorine for you? The reason I ask is, is it getting to the point where you think there is risk of capacity expansions of epi in the market, either competitors’ or customers’ backed entity?
Yes, thanks. I mean, look, a lot of chlorine and chlorine derivatives have moved up. I would say we have a long way to move epi because it’s certainly not at the high end of that range today. Could it move up to a point where it supports reinvestment economics? It’s certainly not impossible. Do we expect to see expansions out in the future, whether it’s in epi or even on the ECU side of the business? Yes, we expect to see some things get announced because otherwise, the world is not going to have enough of those scarce products. Once those expansions are announced, I’d keep in mind that there’s still likely a 4-year gap where demand continues to grow faster than supply. So the only way that changes is if there are just multiple announcements of multiple expansions that continue over the next 10 years.
That’s great. And then maybe just for a follow-up, just digging into the Epoxy strategy a bit. If I look at Slide 7, there’s a lot of talk or discussion around engineered solutions. Is it fair to say that you’re trying to kind of ultimately sell less of [the volume], more commodities, liquid epoxies and try to push it more downstream with the kind of hardeners, epoxy dispersions, things like that? If you could just flesh out kind of where the strategy for Epoxy, that’d be great?
Yes, Mike, this is Pat. And when you look at the Epoxy value chain, we make money across that whole chain and it’s very interlinked as to how we make our money there. So with our epichlorohydrin, like I say, we have multiple knobs on how we monetize that epi, whether it’s selling it into the merchant market. If we get value there or we back out of the merchant market and we take that epi and convert it more to liquid epoxy resin to monetize it or we can take that liquid epoxy resin and further convert it to a solid epoxy resin or other converted resins or we can take that liquid epoxy resin and systematize it into things like wind systems or formulated products or blends. So Mike, we need that strategically, we need that whole chain to be able to have the maximum value over volume choices. That’s really what we’ve been doing, and we’ll continue to do in the future.« Previous Post Next Post »