Olin Earnings Call Epoxy Highlights
October 27, 2022
Olin Corp (OLN) Q3 2022 Earnings Call Transcript
Oct. 27, 2022 12:33 PM ETOlin Corporation (OLN)
Q3: 2022-10-26 Earnings Summary
EPS of $2.15 beats by $0.30 | Revenue of $2.32B (-0.79% Y/Y) misses by $26.01M
Olin Corp (NYSE:OLN) Q3 2022 Earnings Conference Call October 27, 2022 9:00 AM ET
Steve Keenan – Director, IR
Scott Sutton – President, CEO & Chairman
Todd Slater – SVP & CFO
Thanks, Steve, and good morning to everyone. The Olin team is all about delivering on opportunities. We have 2 major opportunities before us. I’ll start with opportunity, number one. We are experiencing recessionary conditions, and the opportunity is to show Olin will perform remarkably different than history may indicate. Over the next 4 quarters, we forecast delivering more than $1.1 billion of levered free cash flow.
This is remarkably different. Don’t worry that we had to pull back from the EDC market, while prices cratered, creating a major PBC value morass and don’t worry that we had to optimize our epoxy participation to support our advanced partners while Asia liquidity temporarily lowered others. These necessary activities are respectful of our core theme to focus on value, set our market participation based on the weak side of the ECU and by liquidity where necessary to lift the value of the ECU, which we did in the third quarter.
And then I know you’re throttling back on volumes in an effort to support the market. That effort appears to be succeeding. But Nevertheless, can you talk about what your operating rates were in the quarter in chlor alkali and epoxy and how you see that utilization progressing here October?
Yes. Well, maybe instead of all of those operation rates, I’ll at least share with you what we’re doing in epoxy if you were to think about the equivalent operating rates, all of our resin production facilities, we’re running below 50% there in order to preserve value. And remember, our recession case said that we could move the whole company down to that level. And so I would just say we have plenty of room left across the rest of the company to make our recession prediction come true.
I just wanted to revisit the Q4 guidance, particularly in light of recessionary conditions and the like. I mean, look, I understand Q4 tends to be seasonally weak. You guys have consistently talked about certain sort of markets, be it EDC, be epoxy conditions over there being even below trough conditions.
But if I were to annualize the lower end of your Q4 guidance, I still come up with, call it, $1.75 billion in EBITDA, which obviously is kind of the midpoint of the $1.5 billion to $2 billion of the guidance range for a trough that you guys have given. So with the conditions evolving the way they are, I mean I just wanted to sort of get your take on how comfortable you guys continue to be with that trough EBITDA guidance range.
Yes. I mean, look, I mean, it’s still our guidance range. And in fact, it’s been our guidance range now for the last 3 quarters as we’ve really been preparing this window to show that Olin delivers a different level of free cash flow than we did before. I will say, of course, I understand annualized in the fourth quarter, and you’re right, get exactly to that conclusion, even though the fourth quarter has traditionally weak factors on top of all the extraordinary factors that are going on in the world right now. I will just again sort of caution that we may experience 1 or 2 quarters that are lower than that in order to set the value equation right for the rest of the year, though.
I mean we’re not going to hesitate to take the proper actions in advance to make sure that value doesn’t decline. We’re not having to do that yet, but it could certainly happen as the recession plays out.
Just curious in terms of your — the volume declines in cab and epoxy down with 1729. What do you think the fundamental volume declines are? And I guess the one way to think about it, too, is if your volumes are flat and your ECU PCI did improve, would your EBITDA — could that — should that have been up year-over-year?
Yes. And so if you — Mike, if you’re asking about sort of what’s the fundamental decline in the marketplace, it’s likely to be less than the decline in Olin volumes because remember, Olin tends to eat those shortfalls in demand from a production standpoint. We may not completely eat it from a sales standpoint because we go out and buy liquidity out of the marketplace at that moment, to fill in that gap a little bit. So you’re going to see our production down more than the decline in the marketplace, you’ll still see our sales volume down more than the decline in the marketplace, but our sales volume declines aren’t as big as our production volume declines.
It’s Chris Perrella on for Josh. The — I was curious as to what you’ve done to hedge out natural gas costs into the fourth quarter and out to next year and at what level?
Yes. Chris, this is Todd. We are, as you know, an active hedger for natural gas as that’s directionally about 70% of our fuel source for power. We — a quarter out, we are very heavily hedged and generally have a rolling 4-quarter program. So you can imagine that we have a portion of 2023 already covered with active hedges.
All right. And then to your earlier comments about flexing down the chlor alkali rate to protect value and cash flow on the shoulder seasons. Is the expectation for that to sort of hold the chlor-alkali rate, your operating rate steady into the first quarter, assuming EDC and epoxy stays where they are now?
Well, look, without getting too specific, Chris, I would just say that there’s going to be shifts and changes in our production rate relative to the liquidity that we buy out of the marketplace. And we’ve already said that limited our participation in the vinyls chain. And it’s certainly not impossible that we choose to limit that participation even further as we enter 2023.
The next question is from Matthew Blair with TPH.
I had a question on the epoxy feedstocks. It looks like propylene and benzene are coming down quite a bit in Q4. Would that be a feedstock benefit to epoxy in Q4? Or do you have hedges and to really think about this as potentially flowing through into 2023?
Matthew, this is Todd. As we think about — especially in North America, the costs have come down from the third quarter. And therefore, that does lower our costs. But once you start around the globe on an international basis, those lower costs really, you’ll see that benefit in Epoxy in the first quarter.
That’s helpful. And then my follow-up is just on the epoxy market. Have you seen any change in behavior since the end of September, either in terms of buying dynamics or selling dynamics?
I would say the same principal trend stays in place. With the China demand shortfall, but yet still running at expanding assets there. We’ve seen traditional trade flows temporarily reversed. So a lot of that material is ending up either in the U.S. or Europe or a lot of material that used to be produced in other countries in Asia and used to — for import into China is coming to the U.S. and Europe. And that really hasn’t changed.
I would say that the good news is there’s been some moderation of the rate of change there. And so there’s some stability there, and we’ve settled with a group of advanced customers that value the Olin solution and also value the fact that our epoxy resin carries a CO2 footprint that’s probably below the CO2 footprint of all that material that’s making its way out of China. So there’s some moderation there.