Olin Earnings Call Transcript Highlights
Olin Corporation’s (OLN) CEO Scott Sutton on Q1 2022 Results – Earnings Call Transcript
Olin Corporation (NYSE:OLN) Q1 2022 Earnings Conference Call April 29, 2022 9:00 AM ET
Steve Keenan – Director-Investor Relations
Scott Sutton – Chief Executive Officer
Damian Gumpel – President, Epoxy and Corporate Strategy
Patrick Schumacher – President, Chlor-Alkali Products and Vinyls
Todd Slater – Chief Financial Officer
Yes. Thanks, Steve. Olin’s first quarter results met a number of expectations, but we can deliver more. That said the broad Olin global team delivered remarkable accomplishments and demonstrating that we have control over improving our value delivery in 2022 versus 2021, in the face of major CAPV power asset challenges and now including a multi-month complete Plaquemine site shutdown and an Epoxy market in which Olin absorbed and continues to absorb the demand shortfall. Both CAPV and Winchester delivered the highest quarterly EBITDA in our history. We were also pleased to announce our blue water joint venture with Mitsui & Company to substantially grow our participation in global liquidity and better service global demand. Complementing our leading position, Mitsui will bring to the joint venture both existing business and a tremendous global capability to drive long-term growth.
So beginning with Slide number 4. There are two main themes that I’ll review in these remarks. One thematic is our Olin winning model and the other is our Olin growth vectors. Here is the simple story of Olin. We’re the global leader in all of our businesses and seek to expand our leadership. Our annual levered free cash flow is $1.7 billion and it is very repeatable. We have a unique system value model that breaks the cycle phenomenon, in other words, the Olin winning model. And we have accretive initiatives in every business; we call them Olin growth vectors. So let’s start with the Olin winning model theme on Slide number 5 and really respond to a very popular question that we get all the time. The application of our new winning model prevents deeply cyclic results that Olin historically inflicted upon itself. Here’s the proposed proof. First on the left hand side from the top down, Olin could absorb demand shortfalls like we are doing today in epoxy, by the way, and run our entire global chemical assets portfolio at 50% utilization rates for a whole year and still deliver close to $2 billion of EBITDA in that same year.
So from the bottom up on the right hand side, so we are speaking of from the $636 million of EBITDA in 2020. We add back material changes that we don’t lose in the event of a recession and could still get to at least $1.5 billion of EBITDA. So with demand growth forecasted to be larger than supply growth across all of our businesses, we don’t see the recession scenario materializing but even if we did fall all the way down to $1.5 billion of EBITDA, we could still deliver more than $1 billion of levered free cash flow in that same year. So a recession year yield of 13% at today’s equity price.
Continuing the Olin winning model theme on Slide number 6, the optionality and the high level mechanics of our model are important to understand. So we have tried to summarize a day in the life of operating our model. First, we set our broad market participation to the forecasted weaker side of the ECU. In other words, we don’t chase the stronger side and we limit our participation on the weaker side.
Second, we determine which Olin chlorine derivative change to give preference based on their relative values. Third, we decide how far downstream in each derivative chain we will participate. And finally, as a fourth step, even for the products that we do participate in, it may make sense to purchase liquidity from the global market instead of producing the product.
The operation of the model is clearly more sophisticated than the simple summary. And as you might imagine, the operation is really executed across a deep and rational culture of value. Now let’s move to the Olin growth vectors thematic beginning on Slide number 7. Considering the backstop of our successful model, we can now cross an inflection point and run growth initiatives.
In epoxy, on Slide number 9, Olin is positioning its technology to take advantage of robust future demand driven by megatrends. There are clear and specific global growth factors that will pull on epoxy demand, namely giant wind turbines, lighter automobiles, electrified vehicles and more sustainable construction methods. For each of these vectors, Olin has developed a proprietary epoxy system to solve a technical and enabling feature needed in the end product.
Hi, guys, a nice quarter and outlook. In terms of Epoxy, I was just curious – I think you’ve mentioned in the prepared remarks that demand is a little bit kind of soft. And just wanted to get a little bit of color on that and how you see sort of Epoxy performing over the next couple of quarters?
Yes. Hi, Mike, I mean, Damian, give us just a couple of comments on that. But just to make it even clearer, yes, demand has come down. We’ve absorbed that demand shortfall. And in fact, the first quarter was the lowest volume Epoxy quarter in the history of this business. And I think Damian can give you a view of where demand sort of sits right now.
Sure. Mike, good morning. Yes, we look at three factors meeting demand right now. First is obviously the situation – the unfortunate situation going on in Europe. The second area is the ongoing supply chain issues that are making it difficult to get other materials in then combined with the epoxy to make a finished good. Automotive is a clear example there. And the third example, the third area we see is China with the ongoing deep lockdowns that are underway here in the first quarter. All those factors are meeting demand some. That said, we are seeing that second quarter demand is a little better than the first quarter. We would normally expect that with seasonality. So we are seeing that.
The U.S. continues to have a good, robust epoxy demand and we continue to – but all that said, we continue to set our value point for LER. We don’t come off of that value point. We moderate our production based on the demand that’s available to us from our customer base. And the last comment I’ll say is that even with all that, we’re not seeing – the world is able to make more LER and that kind of reinforces our point that right now, Olin is – we continue to absorb the demand shortfall out there.
Yes, good morning. Scott, I’d appreciate your updated view on pricing prospects in both chlorine and caustic. With the Plaquemine site down for a multi-month period, we’ve seen some of your competitors put forth very aggressive or at least high price increase proposals for the second quarter. Can you speak to supply-demand balances in the industry as they are and what that might mean for the price opportunity over the near term?
Well, Patrick will give us a little color on forward value plays by Olin. I would just tell you that it’s been quite tight and all of this makes it even tighter. And even on a long-term outlook, we tried to demonstrate in our last quarterly call that demand growth certainly outstrips supply growth. So that’s just setting it up. And Patrick, do you want to expand a little bit?
Yes. I would just say that prices in the quarter moved up meaningfully from the fourth quarter for all of our businesses. In the market, there was – as some of you noted in your notes, there is a bit of a lull in Asia in the middle of the first quarter in that caustic market, but those prices are moving again. You guys saw it would just settled in Europe for contract prices for the second quarter. That’s a reflection of tightness in that caustic market globally. So we see pricing momentum continuing really across the board.
Great. Thanks for taking my question. I guess I just wanted to – you noted some soft demand in Epoxy. So I guess, first, I just wanted to ask about if you can kind of go through your markets a little bit, let us know what you’re seeing? I know – also you said there is some weakness in Asian caustic in Q1. But structurally speaking, I guess, how do you see your different end markets? And maybe if we could just focus on chlorine, caustic and epoxy in Winchester, that would be great. Thanks.
Yes. I mean from a high level, I mean, end markets are generally fine, except where we pointed out that epoxy got a bit slow for reasons Damian went through, be it Asia, auto Europe and a little bit of a lull even in wind blade production that does come back. That has actually stabilized and that was the nature of Damian’s comment where he said that, look, second quarter looks just a bit better than first quarter in terms of demand. I mean, demand is fine everywhere else. Of course, supply is quite tight also. If you take it to our Winchester business, which we haven’t talked about yet on this call, demand looks long-term good. In fact, with all the events going on with Russia’s war effectively they were the largest importer of ammunition into the U.S., in fact, about 12% of the market. And I suspect the U.S. is at long for continuing to import that ammunition. So that’s just one more item that enhances the demand profile looking forward for Winchester.
Yes. So I was curious about your multiple pathways on Slide 6 and you’re clearly moving downstream into epoxy and vinyls. I was just curious if there might be some other pathways you could consider and one that seems possible would be the isocyanate into polyurethanes. Do you sell phosgene into the isocyanate industry and is that another potential path for you?
Yes, I mean, thanks for the question. Look, there’s lots of paths that are possible in the ECU world, right. And we’re already a supplier of either chlorine molecules or chlorine derivative intermediates into many different chains, right. The ones we put on that Slide 6 are the chains that we effectively operate today, right. We were always considering different acquisitions, mergers, whatever the case is. And there’s a number of derivative chains that could make a lot of sense, especially as Olin’s equity value gets lifted as well, it’s challenging to do a big move today considering where we trade at, not impossible, just challenging.
Thanks very much. You said that you expected to earn more in your chlor-alkali business in the second quarter than in the first. Why is that given all of the difficulties that you’ve got, are the operational issues in the second quarter less than they were in the first and how big were the operational issues in the first quarter?
Hi Jeff. No, the operational issues in the second quarter are more significant than the first quarter. In fact, it’s when all of the negatives sort of merge together but the path that we’re on Jeff to continue enhancing the value of the ECU and derivatives from the ECU has a lot of continuing momentum. That continuing momentum overwhelms those negative issues. I think in the press release, we called out that just the plaque of event itself has a direct negative of $75 million to our earnings in our CAPV business. The other events have negatives as well, but we overcome all of those, based on the momentum that we have in the business to improve the value.
Yes. Hi, thanks for taking my question. I just had a follow up on your recession scenario analysis. Just curious that, so it looks like you’re taking operating rates down but you’re assuming that you can maintain pricing at least on the chlorine side. I was wondering if you could comment on what your pricing assumption is there on the caustic side as well. And just going back to chlorine, what gives you confident on being able to maintain that pricing? Is there something contractually set that locks that in place for you guys? Or are you just assuming you could deselect where it weakens? Thanks.
Yeah. Thanks for the question. I mean, it’s really like a chicken or egg question, right. I mean, this is of course a hypothetical case, just trying to demonstrate the extent that we’re willing to go to preserve our product pricing. I mean, the reason you would take your complete global chemicals assets down to a 50% utilization rate for a whole year is to preserve product pricing, right. So we control our own destiny there and we’re positioned to do that even in the case of a global recession, particularly on – you brought up merchant chlorine, that for many years sort of priced in the low $100 a ton, and we’re directionally moving it toward $1,000 a ton on a pricing ratchet that we won’t have to move back from. Even in a recession when you think about the applications that are left with merchant chlorine, it’s things like water treatment and wastewater treatment and pharmaceuticals and agrichemicals those demands continue.« Previous Post Next Post »