The Urethane Blog

Olin Epoxy Comments from Investors’ Call; Novalac Plant Shuttered

Hassan Ahmed

Scott, congratulations on the new job. A question around strategy. Appreciate some of the color that you gave in your earlier remarks. Can’t help but sort of think about your past life and your time at Celanese and the sort of similarities between the acetyls chain and the chlorovinyl chain in terms of oligopolistic nature and the like. And as I sort of sit here and think about the evolution of the acetyls chain, there was a step change in profitability over there collate from 2011, 2012 onwards. And if one thinks about some of the strategic changes that were implemented, I broadly think about 4 silos.

There was utilization rate management that was exercised, doing more with the network as you guys used to call it, feedstock optionality and commercial flexibility. And it seems all of those things are pretty applicable to chlorovinyl, and it seems that, that’s the direction you guys are headed in. So is it fair to assume that each and every one of those things can be hit? And this $50 million to $200 million number that you’re talking about in terms of exercising your leadership position, over the long run, actually could be far greater than that?

Scott Sutton

Yes. I mean, I guess what I would say is, look, I mean, we’re going to go out and lead with this winning model, right? You described some parts. The main feature of it is we’re going to exercise our number one positions. And so how are we going to do that, right? We’re going to be interacting with global supply-demand. We’re going to be impacting our own global supply-demand. And that means we’re going to be surging inventory when it’s appropriate, releasing inventory when it’s appropriate. We’re likely to do more trading as we reach into pockets of global liquidity that are already out there.

We’re not going to be selling into poor quality markets. And when we do that, we’re going to be overlaying a price increase, and that lets us open and close arbitrage window. So that’s the main elements of how we’re going to go out and manage our landscape. And Hassan, underneath all that, we will certainly have rigorous commerce. We use the terms edgy commerce in here to make sure we get the next — or the best price that we can get and get the breadth, best deal in place at every customer.

Overlaying all this in the future, you’ll hear us talk about using forward intelligence. You can think of it as AI, almost, to predict the best point that we should run at. So where are we going to set our ECU knob and know that three months in advance? So it really contains a number of elements, right? You’ve got that umbrella of where to set our ECU knob, how we manage our landscape and then our edge e commerce activities. So that’s what it sets up for. In the future, Hassan, I expect it to bring more than the numbers we quoted.

Vincent Anderson

When I think about the $50 million to $200 million target, how are you thinking about the near-term balance between maybe some additional SG&A for those direct negotiations, incremental capital for inventory management infrastructure, fixed cost coverage, things like that, kind of relative to what you see as easy wins in the near term?

Scott Sutton

Yes, sure. So Jim is going to answer the bulk of this question. I mean, I would just say that we have broad opportunities across all those buckets for productivity and it’s many small things that are going to add up to a big thing, right? Internally, I like to say we’re masters of the small on this. But I’ll let Jim answer this.

James Varilek

Sure. Yes. I would say that your comment on adding SG&A to have these capabilities and so forth and, quite honestly, we’d probably be working at getting more efficient rather than adding and still being able to cover what we need. From a productivity standpoint, we actually have very well established programs here and in every division, every function, every site has productivity goals and objectives for not only the coming year but have had the past years.

In fact, just a point of reference, we actually have 1,127 active projects across the company are geared towards driving productivity and getting our fixed costs and our cost down to be able to make sure that we can pull that lever and deliver on that $50 million to $100 million net productivity objective that we have. So we do have momentum on productivity, things like — you’ve heard about our vinyl chloride asset closure, the chlorine closure that we announced about a year ago or so. Epoxy Novalac plant is closing as well.

So we have a number of projects and so forth that will deliver momentum as we head into 2021. And there — some are large, some are small, but they all add up at the end of the day. So we feel confident about that $50 million to $100 million.

Eric Petrie

Olin acquired the Dow Chlorine Products business to expand their chlorine envelope. Where are you thinking that value could be uplifted and captured from those downstream products? And what currently now is in your view, poor quality or low economic return?

Scott Sutton

Yes. I would say that it’s going to be across the entire portfolio, right? And there’s been a lot of effort and money and sweat so many people to put this company together that we don’t have to go out and build anymore, right? And we don’t have to pump a lot more money into that building process. So I mean, we have a game plan to start leading, using what’s already been built. And that’s going to be our game plan until that ECU profit contribution index gets to, whatever, 1.5 or 2. We’ve got to get up in that range to match what we said we do at Investor Day. And we’re going to do it.

As far as areas that we’re lifting, I mean, lifting merchant chlorine is fundamental to this company. And so you see us out there doing that. That’s going to — that’s going to push along and drive many things. In fact, all the way through our Epoxy business which I’m going to ask Pat to come in on here in just a minute. And our Epoxy business is one of our downstream businesses that is subject to this Chlor Alkali ECU winning model and also has its own similar landscape management model built in around epichlorohydrin and Epoxy. So Epoxy, to your question, is one area that we can absolutely lift margins on.

And so I’ll ask Pat, will you comment a little bit on that?

Pat Dawson

Sure, Scott. Like you were saying, just a little bit of the lead in around epichlorohydrin. We’re the only producer of epichlorohydrin now in North America, and of course, we got a major leadership position on epi in Europe as well. And so epi is really critical to strategically what we’re trying to do with our Epoxy portfolio and then how we monetize that epi in the form of liquid epoxy resin, solid epoxy resin and other ways we can sell those epoxy resin equivalents into the downstream.

So back to the plot here, of not selling into low return segments applies to Epoxy, just like it does in the rest of the portfolio, driving productivity. Jim mentioned, we just made the announcement to shut down a Novalac plant in North America, which wasn’t productive. And we have other ways to still participate in that market, but in a more productive way with our asset capabilities in Europe. So I think through epi and how we monetize that epi into various channels, where we select having a sharper edge on where we sell, the epi and the liquid epoxy resin is exactly what we’re going to do.

Matt DeYoe

I understood. And then if I were to think about maybe like three to four big opportunities you think you have in your back pocket to drive growth, I know you mentioned like epoxy being one — sorry, epi being one, but perhaps other things that we’re not thinking about as it relates to kind of what can be kickers on EBITDA over the next two years?

Scott Sutton

Yes. Well, in the next two years, right, it’s all about growth in ECU contribution profit, right? I mean, we have some opportunities for volume growth, but it’s not about volume growth, right? We lead in volume. We can get volume any day that we want to get it. But it’s all about growth in unit profitability, because that’s the number one thing we need to be the value player and be the value leader.

Some of those things that are certainly solid growth in volume is Epoxy. And Pat spoke to that earlier, and look at some of the applications we sell into like [perming] blades on the power generation wind mills, right? We were probably the epoxy in one of every three of those that’s in the world, and that’s definitely a growing segment for us as an example. I would say some of our coordinated organics that go into next-generation refrigerants are a good source of growth for us. And perhaps the number one source of growth for us is in small caliber ammunition as there’s great positive fundamentals there on both the military side, and the consumer side as well as participation is way up.

And just as an example of that, more people are now doing shooting sports and target shooting, then they’re fishing, then they’re camping, then they’re golfing, whatever the case is. And that’s a long-term fundamental that’s driving demand right now, and it’s where we have our biggest backlog in the company by far.