Urethane Blog

Olin Epoxy Comments from Investors Call

July 29, 2022

Olin Corporation (OLN) CEO Scott Sutton on Q2 2022 Results – Earnings Call Transcript

Jul. 29, 2022 12:15 PM ETOlin Corporation (OLN)

Q2: 2022-07-28 Earnings Summary

EPS of $2.78 beats by $0.25 | Revenue of $2.62B (17.77% Y/Y) misses by $41.49M

Olin Corporation (NYSE:OLN) Q2 2022 Earnings Conference Call July 29, 2022 9:00 AM ET

Company Participants

Steve Keenan – Director-Investor Relations

Scott Sutton – Chief Executive Officer

Todd Slater – Chief Financial Officer

Scott SuttonPresident and Chief Executive Officer

Yeah. Thanks, Steve, and good morning to everybody. The Olin team did a great job delivering the highest quarterly EBITDA in our history, and delivering the fourth quarter in a row where EBITDA was $700 million, plus or minus, even though global economic conditions declined. We did what we said we would do.

We ran our model of leadership and accelerated our reduction of Olin share count without adding debt to our investment grade balance sheet. Still many imagine us all the way down in the earnings and free cash flow gutter in the imminent recession. So I will solely focus my remarks on what Olin looks like in a recession, and then on why Olin is a good investment in any event. So let’s go back and revisit the recession, EBITDA and free cash flow slide from our first quarter earnings call shown here as slide number 4.

Starting on the left-hand side of the slide, from our $2.8 billion EBITDA 12-month run rate, it is certainly not impossible that the CAPV business experiences lower, longer-term operating rate reductions as we focus on maintaining the value of our products through a recession. The associated percent drop in CAPV EBITDA could be like what our Epoxy business is experiencing. The combination of the two business performance reductions result in a $1 billion EBITDA drop. The right-hand side of the slide seems to be more interesting to most Olin followers.

Starting from the 2020 EBITDA result of $636 million, the three line items that we don’t expect to repeat in a recession under the new model are low core in pricing, selling cash-negative EDC and Winchester operating in a significantly smaller demand structure. All three line items seem to be well accepted. The fourth upside line item called other structural change needs some clarification though. Included in that upside line item, are the materialized fixed cost reductions for the closure of 865,000 ECU tons of chlor alkali production, an updated epichlorohydrin positioning, maintaining part of the improved epoxy pricing under our new model of value, an improved VCM contract arrangement in gains from multiple alliances.

In this recession scenario, Olin still generates $7 per share or more of levered free cash flow. In fact, we welcome the opportunity to further reduce our share count right through the middle of a recession. Obviously, we’re bullish on Olin. Slide No.

5 shows why. We’re the leader in every one of our businesses, and we run a model that looks around corners so we can position for the future today. So said differently, we take difficult actions early in the cycle. Part of that positioning is to temporarily reduce participation in markets with poor future quality indicators.

Our curtailments in Epoxy and associated upstreams at Freeport and Brazil, as well as an EDC and Freeport continue today. Both Epoxy and EDC represent weakness on the chlorine side of the ECU. Accordingly, we match our market participation to the weak side of the ECU. This is a fundamental change to our positioning from prior periods.

Additionally, we expect to curtail epoxy and associated upstreams again stated Germany late in the third quarter, in part due to the European energy situation. Our complete company strategy changed from heavy volume to nimble value along with the currently understated equity valuation positions us to buy up to 20% of our outstanding shares in a year even in a weak economic cycle. Our new $2 billion share repurchase program reflects our board’s confidence in Olin’s future earnings and cash flow generation. With our solid balance sheet and strong cash flow, the company is well positioned to execute on this attractive opportunity to invest in Olin.

Jeff ZekauskasJ.P. Morgan — Analyst

Thanks very much. Can you talk about the state of the Epoxy market and what your Epoxy volumes were like in the second quarter relative to the first?

Scott SuttonPresident and Chief Executive Officer

Yes. Hey, Jeff. Yes. I mean in epoxy, our volumes in the second quarter actually declined from the first quarter.

In fact, we ran the lowest volume quarter in the history of the business. The big driver there, Jeff, is China. I mean China is at least 50% of the world’s consumption of epoxy, consumption has declined much more than supply decline. And essentially, China has flipped its trade flows has effectively become a net exporter of epoxy and epichlorohydrin and a lot of that material is moving into Asia.

And consequently, all of that material that is already produced in other parts of Asia, is moving into Europe and into North America. Now we all know this is a temporary situation, but it is incredibly dramatic and effectively, we’re running that business. You can think of it 50% sort of asset utilization and we’re taking those difficult choices and making those asset and market moves to make sure we preserve value through this time. It just really doesn’t get much worse than this.

This is sort of beyond what you would expect out of a recession when you combine the European situation as well.

Arun ViswanathanRBC Capital Markets — Analyst

Great. Thanks. So you also mentioned, I guess, in the release that you’d likely see a reduction in rates at start as well. And so does that mean that you kind of flip back and increase the rates at Freeport? Could you just update on how you’re thinking about managing through this higher energy cost environment, and some of those demand trends that you’re seeing there?

Scott SuttonPresident and Chief Executive Officer

Yes. Sure. I mean, when and if we take that action later here in the third quarter, I mean, we’ll balance some of that with ramping up production at our other sites. But still, in this time period, this third quarter and moving into fourth quarter, I mean you’re going to see us run our overall system in Epoxy still at very, very low rates as we reduce our participation.

Lots of areas of that market are still pretty poor quality.

Arun ViswanathanRBC Capital Markets — Analyst

Thanks. And as a quick follow-up, you mentioned that China has flipped their trade flows in the Epoxy, I think. And just curious, if you’re concerned at all about that as it relates to caustic or other chlorine products just because — if your outlook does call for potentially increased caustic margins, or ECU margins, because of reductions in operating rates due to chlorine weakness, what — do you expect more exports to wind up on the West Coast or the East Coast here because the returns are so great? And — or is that unlikely? And then, I guess, just on that note, are you satisfied, I guess, with the 865,000 tons of closures. Does that kind of take care of all of your high-cost capacity, or would you expect to take more action on that side? Thanks.

Scott SuttonPresident and Chief Executive Officer

Yeah. Sure. I mean, look, what you described has already been happening. I mean, with the slowdown generally in China demand relative to production, we’ve already seen additional caustic exports out of China, just like there’s been a lot of extra PVC exports as well.

So that has been going on. And our model is already adapted to offset that exposure. And we’ve seen those flows come in, and we’re working around flows. And still, we go out in certain cases and purchase some liquidity out of the global market space and maybe move it to a different area.

I mean, look, with regard to the 865,000 ECU tons, and just as a reminder, that 865,000 ECU tons included shutting down the remaining 200,000 tons of ECU capacity that is diaphragm based in McIntosh, Alabama. And we have already accomplished that. In fact, we pulled it forward, so all of the diaphragm capacity is down in McIntosh, Alabama. We’ll have to see we’re satisfied with that.

I mean, certainly, that’s made a difference in our ability to be nimble and drive for value. But that number has taken us to a reasonable point for now. There’s always other options.

Steve ByrneBank of America Merrill Lynch — Analyst

Thank you. Just a couple questions regarding the statement about you’re running — you could run your assets at 50% rates for a year. Where would you estimate your operating rates are likely to be in the third quarter? And can you comment on the significance of the one-year phase? Is that — is there something implicit in running at rate that is really unsustainable beyond just the financial impacts?

Scott SuttonPresident and Chief Executive Officer

Yes. Sure. I mean the only business that we really provided indications on where we’re running is our Epoxy business. And we’ve said we’re running that business pretty close to 50% operating rates.

I would just say in our CAPB business that we’re well above that level and have plenty of room there. The only significance in the one year is we were trying to demonstrate what is the lowest full-year EBITDA that Olin might have in its future. So we picked a pretty long recession scenario. In other words, one year where the global economy declined so much that we had to run at that rate every day for a full year.

We’re trying to be a bit conservative here because clearly Olin’s equity value is driven by the view that under that kind of scenario, our EBITDA must be much lower than where we believe it is. So we’re just trying to present a compelling case that says we are good in a recession. And in fact we can create value via a really good capital allocation right through the middle of that recession. So that’s the idea that’s behind that 12-month window.

Mike LeitheadBarclays — Analyst

Got it. Makes sense. And then maybe just a second, I want to circle back to I think your answer to Jeff’s question about Epoxy and China turning to a net exporter. And just – when you look at other chemical products or cycles when you see that happen, things do tend to get a bit sloppy for a bit of time.

So can you just walk through your comfort that that’s not the case for Epoxy or EPI right now and try as you say?

Scott SuttonPresident and Chief Executive Officer

Well, no, I would just say that it is already it takes for EPI and Epoxy. There is so much material that used to be imported into China that now because of the mismatch of China’s internal consumption versus their production. Now that material that used to move into China does not anymore. Most of that material came from other Asian countries.

Consequently those other Asian countries have been exporting that material to North America and to Europe. And that’s been going on for a number of months. And that is why our Epoxy earnings came down. We’ve elected not to participate in that have our value remain where it is.

And when that reverses, which it will reverse, we’re left where our volumes return but the return at the pricing level that we had notched it up to.


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