Olin Corporation (OLN) Q2 2023 Earnings Call Transcript

Jul. 28, 2023 12:15 PM ETOlin Corporation (OLN)

138.98K Followers

Q2: 2023-07-27 Earnings Summary

EPS of $1.08 beats by $0.06 | Revenue of $1.70B (-34.91% Y/Y) misses by $168.30M

Olin Corporation (NYSE:OLN) Q2 2023 Earnings Conference Call July 28, 2023 9:00 AM ET

Company Participants

Steve Keenan – Director-Investor Relations

Scott Sutton – Chief Executive Officer

Todd Slater – Chief Financial Officer

Scott Sutton

Thanks, Steve, and good morning, everybody. Global market conditions continue to be quite poor. Additionally, our performance in the second quarter was not up to expectations, partially due to the previously announced Freeport vinyl chloride monomer plant operating issues, but also due to excessive Asian Epoxy resin exports and our associated Epoxy asset right sizing activities. These factors will result in a lower trough expectation for 2023 adjusted EBITDA. The bright spot in the second quarter was our purchase of 2.5% of our outstanding shares while simultaneously reducing net debt compared to the first quarter. Since January 1, 2022, we have purchased 21% of our outstanding shares.

In the third quarter, we expect Epoxy resins and system sales volumes to slightly improve relative to the second quarter. However, inventory reduction efforts will lead the business in negative EBITDA territory. While Winchester’s performance is expected to slightly improve in the third quarter, mainly due to international and domestic military growth, our Chlor Alkali and Vinyls business is expected to be slightly down, mainly due to execution of our leadership model as we see bottoming of ECU values in some geographies likely a positive sign for 2024.

This is our time to be testing, and I am confident that the Olin team is up to that test. It should be clear from Slide number 4 that Olin believes running a value strategy with lots of built-in free options, delivers more total cash for shareholders versus any alternative strategy. Looking forward, we are working on numerous initiatives to make sure both future peaks and troughs from that value strategy are higher than our previous results. Those initiatives are spelled out on Slide number 5.

Hassan Ahmed

Understood. And sorry, it’s – the peak side of it, I also wanted to sort of touch base on. You guys sort of flagged over $3 billion in the next peak, right? And if I take a look at what you guys on a quarterly basis were run rating in Q1 2022 and Q2 2022, it was over $850 million. And clearly, utilization rates weren’t as tight as they potentially could be in the next peak, right? And you hadn’t sort of restructured the Epoxy business as you are right now, right? So, I mean, from the sounds of it, $3 billion in the next peak actually sounds pretty bare bone, is that fair?

Scott Sutton

I mean – yes. I mean, Hassan, look, our outlook certainly says that the structure of Chlor Alkali only gets better over, over time. And it’s true that we’ve done some restructuring in our Epoxy business. But I will say that in order for Epoxy to get back to the levels it was that – that’s probably a couple of years out. So you’re going to see the next peak in Chlor Alkali while Epoxy is still recovering. And that’s why we put the next peak at somewhere just about $3 billion.

Hassan Ahmed

Understood. And one last one, if I may. On Dow’s earnings call, they basically talked about how their contract with you was renewed through 2035. Is there any sort of commentary you can give about? I know historically, sort of Olin’s talked about not really making any money on that contract. But is there any commentary you guys can give us about that renewed contract?

Scott Sutton

Yes. I would just agree that we did reach an agreement, and I think that’s going to be good for everybody in the future.

Steve Byrne

Hi, thank you. Just continuing on to this peak EBITDA discussion. Is it more driven by Chlor Alkali? And is your view on Epoxy a little more measured than it used to be? And with the former Chlor Alkali and – are you moving any further down the path of partnering on some downstream polymer capacity? Or is it a little too early for that?

Scott Sutton

Well, I would say, I mean, the big driver of it is certainly Chlor Alkali. There is no doubt Epoxy will improve, but the structure of the Epoxy industry, when you have a China, that’s probably added almost 20% to the world’s supply capability in the last 18 months or so, it’s going to take a little more time to recover. I mean I’d also call out our Winchester business as well. I mean that business has great fundamentals, particularly in the growth of international and domestic ammunition. So it’s those things that will get us there.

Mike Sison

Okay. And then just in terms of where your mid-cycle EBITDA could be? Is it sort of the delta between the peak and this year? Or is it a different number? And how long do you think it takes to sort of get to sort of a mid-cycle number?

Scott Sutton

Yes. Well, I would just say, Mike, that we expect 2024 to be better. There’s good signs to that. I think even though they are slowly maturing signs and 2025 looks even better than that. So it’s in that range.

Michael Leithead

Morning. First question on epoxy. When you look at Asian exports and the prices they’re selling for in the market, is your sense that producers there are below cash breakeven levels? And if so, how, if at all, does that change your thinking about how Olin should approach, say, the epoxy value chain?

Scott Sutton

Yes. Thanks for the question. I would just say, yes. I mean you got to remember in China that they’ve been operating with favorability of negative chlorine values, right, at potentially negative hydrochloric acid values. So those key inputs, which is just one input, has gone into the epoxy chain with somebody paying the producers of epoxy to take it. That’s totally different than any other geography, and it has nothing to do with covering any kind of level of fixed cost and certainly no return on capital. So yes, I think that’s a real issue. We’re going to consider what we’re going to do about proposing duties in certain geographies as well because this really can’t go on.

Jeff Zekauskas

Thanks very much. You’ve always spoken of negotiation of the Dow contract has a meaningful future benefit in 2025. Now it seems that Dow is going to take less chlorine and caustic because of what they’re doing in propylene oxide. Is it still a meaningful jump for Olin in 2025? Or is that no longer the case?

Scott Sutton

Yes. I would say it’s really a positive arrangement for Olin. And Jeff, I mean you’re right that one PO unit Dow has announced that they’re closing that. So that volume goes away. But other volumes at that same site remain, and the site in Louisiana becomes the site of focus for the bigger volumes.

Jeff Zekauskas

So we shouldn’t expect some meaningful contractual – some meaningful EBITDA benefit to you in 2025 because of the renegotiation of the contract. Is that correct?

Scott Sutton

No, I think it’s positive, Jeff.

Duffy Fischer

Yes. Good morning. Scott, I was hoping, can you just kind of summarize all the changes you’ve made to your epoxy footprint and what does that do to the upside coming out? I mean, how much capacity have we taken off when we get through this downturn, how much different is your footprint today?

Scott Sutton

Yes, I mean, we’ve made and are in the process of making quite a number of changes. Upstream, I’ll say that we exited a Cumene plant. We exited one of our BPA facilities. In the resin area, we reduced our capability both in Freeport, Texas and in strata [ph] and then at a few downstream plants, we reduced our capability in solids epoxy resin, and then we shut down a facility in Korea. So, yes, I mean, that has reduced our capability some. What I will say is that in epoxy, we had at least two of everything to begin with and sometimes three or four of everything. So we’ve gotten rid of that overhang. We’re much more efficient now, and it’s not going to take a massive amount of volume to put as closer to a higher capacity utilization, and we’re still working to get those costs out.

Aleksey Yefremov

Thanks, Scott. And coming back to your configuration with Dow, as you mentioned, Dow will shut some PO capacity at Freeport that will free up some of your chlor alkali capacity. Should we assume that that’s not used in any way? Or is it more likely that you’ll look for some other derivative opportunities either through joint ventures, other arrangements or even organic investments downstream of chlor alkali.

Scott Sutton

Well, I would just say it opens up possibilities, right? And those are sort of some of the free options that we have going forward and we haven’t made a decision about that.

Matthew Blair

Hey, good morning Scott and Todd, circling back to the Dow contracts, Scott, you mentioned it was a positive resolution there. Should we think about this as being more significant on the free cash flow side for you than the EBITDA side? Or can you give us any color on that?

Scott Sutton

So, I would say it’s probably favorable for both parties on both sides, because there’s some real win-win elements of this, and that not only helps how we’re both running our day-to-day operations, but it also prevents inefficient investments on both parties side, which drives free cash flow. So, I would just say it’s a positive for both parties on both those fronts.

Matthew Blair

Sounds good. And then do you have any more commentary on the epoxy side. In terms of demand, could you talk about how things are going in areas like electronics and wind and autos?

Scott Sutton

Yes. I mean, look, the demand in all of those areas as well, at least in electronics was certainly sluggish. Automotive coatings at least in the U.S. has shown some recent recovery and you’ve seen some of that in the coatings company’s earnings announcement here. There is a nice portfolio of wind projects, and that’s one of the biggest outlets for our systems activities, but those projects go through stops and starts, and there’s been some level of inventory adjustment in those supply chains. But I would say all three of those areas as we move into 2024 are positive.

Frank Mitsch

Hey, good morning. If I could just point of clarification. The new terms on the Dow contract, did they take place when the old one was supposed to expire in October of 2025? Or is there a different effective date for the new terms?

Scott Sutton

Yes. I mean that’s roughly right. I mean, Frank, I won’t comment on all the different dates and all the different improvements, but I guess you can average it there.

Frank Mitsch

All right. Awesome. Thank you. And yes, I totally appreciate the difficulties in the epoxy business, and obviously, you’ve been taking number of steps to improve your own footprint. You’ve outlined some of them. And I know in the past, you’ve indicated that some of these actions should start to lead to a $50 million annual EBITDA improvement starting in the fourth quarter, given the degradation in the broader markets, how should we think about sort of these actions that Olin is proactively taking will start impacting your income statement.

Scott Sutton

Yes. I mean, principally, you’ll see it more in 2024. It’s actually being effective today and into the fourth quarter, Frank. But we’re having to clean up our inventory on the balance sheet a bit. And that is offsetting some of that underlying improvement that will expose itself after a couple of quarters here.

John Roberts

And then is any of the Parlay activity in epoxies? Or is it all in chlor alkali items?

Scott Sutton

Well, the majority of it is in chlor alkali. We’ve been successful at running that Parlay strategy in epoxy until capacity utilization got so low. And so we’ve reduced that participation there. It just doesn’t make sense to do it at the moment.

John Roberts

Do you have any longer-term targets for both total Parlay and the balance between Epoxy and chlor alkali?

Scott Sutton

Well, I wouldn’t say there’s a target for a balance between chlor alkali and epoxy. I would say that we’re going to do the right amount of Parlays so that we can keep a leadership strategy in place and keep our product values up even when our capacity utilization is low. So when our capacity utilization is very low, like it is now, you’re going to see big percentages. When it goes up, you might see some smaller percentages. However, I will say that Blue Water is out there trading more caustic and more EDC across the oceans and that trading activity will continue and grow no matter what our capacity utilization is.

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