Q4 2019 Earnings Call
During the fourth quarter of 2019 own reported adjusted ebitda of approximately 173 million dollars.
Which resulted in full year 2019 adjusted ebitda of $941 this level of adjusted ebitda reflects the challenging macroeconomic environment that developed during the year and worse and during the fourth quarter in particular the chlor-alkali products and vinyls business experience a broad-based weakness in demand from urethane agricultural refrigerant off and Pulp and Paper customers the epoxy business also faced weaker demand from Automotive Electrical laminate and Industrial codings customers, as you can see from the chart the lower package demand put downward pressure on pricing which was the driver of the lower year-over-year adjusted ebitda the deterioration of pricing during 2019 and our clerical light bulb vinyls business was approximately four hundred fifty million dollars from 2018 levels and the deterioration in our epoxy business was approximately two hundred and sixty million dollars dead.
There were a number of factors that helped partially offset. These price declines lower raw material costs of approximately a hundred and thirty million dollars in our car for like products and final segment primarily relates to lower electricity and ethylene cost. We realized lower raw material cost in the epoxy business of approximately 215 million dollars, primarily Benzene and propylene all accelerated its ongoing activities to lower our cost structure and to improve our efficiency operating in administrative costs in 2019 were approximately ninety million dollars lower than 2018 long as a point of reference since late 2018 Owens total employee and contractor headcount was reduced by approximately 6% and an additional reduction approximately 4% is expected to incur in 2020. Now we'd like to take a more detailed look at the quarterly results for each of our business segments starting with chlor-alkali products and vinyls wage.
He's shown on slide for.
Fourth quarter 2019 adjusted ebitda for the chlor-alkali products and final segment was a hundred and forty two point five million dollars representing a $46 2% year-over-year Define as previously discussed. This decline was driven chiefly by the the declines and product pricing for the fourth quarter caustic soda pricing and Owen system declined approximately 25% when compared to the fourth quarter of 2018 at the same time, you're over your ethylene dichloride experienced power lower pricing of approximately 23% and hydrochloric acid pricing declined approximately 40% partially offsetting this year-over-year pricing pressure was the improved cost performance as well as the lower raw material cost that I just discussed. Now let's take a closer look at caustic soda pricing which is on slide 5 during the fourth quarter and into January 2020 caustic soda prices continue to move lower wage.
demand weakness in the manufacturer
Sector persisted at the same time chlorine operating were made rates have remained relatively steady primarily to do to strengthen the vinyl sector which increased the supply-demand imbalance that has existed for much of the past fifteen months. The caustic soda price decline has been particularly pronounced in export Market. We're pricing indices were down more than $80 per ton since the beginning of October and approximately $200 per ton since the end of 2018 expert caustic soda pricing has declined to levels last seen in 2010 domestic pricing while lower was more resilient do to support from a relatively stronger domestic demand environment and the overall cost to service Market a portion of the fourth quarter and January declines price indices will be experienced on our system as we progress through the early months of 2020.
It's now talking about our epoxy segment, which is shown on slide. Six epoxies Owens epoxy business generated adjusted ebitda thirty six point two million dollars in a quarter of 2019 which represented an 18% decline from the level achieved in the prior year. The year-over-year decrease primarily reflects lower. Resin pricing do to lower demand job Market's a trend that has challenged the business for the last fifteen months partially offsetting these market conditions during the period for lower raw material costs, primarily Benzene and Proclaim and lower operating costs driven by our ongoing productivity efforts that said price declines outpace lower raw material costs resulting in further margin compression for Olin as we close the year the epoxy segment generated $154 million dollars of an adjusted ebitda for the full year 2019 while not the year-over-year Improvement that was originally in, Georgia.
It was strong.
Performance in the face of a challenging Market landscape we and we continue to believe that the strength of the epoxy business is Corinne integration and potential and and in the the tensioner earnings power for this part of our business looking now at Global epoxy resin prices, which is shown on slide 8 during the fourth quarter liquid epoxy resin pricing with the decline in all regions, the average global epoxy resin pricing declined 20% over the course of 2019 ongoing demand weakness from Global Automotive Global Electro and Industrial Coatings customers has led to Global price of erosion. We also believe economic deceleration in multiple. Geographic regions has led to cautious buying behavior and inventory wage by customers during the. Now, let's turn to our Winchester segment on slide eight the Winchester business continued on a positive trend posting its second consecutive quarterly year over. Yep.
increase fourth quarter of
2019 adjusted ebitda was 12.5 million dollars which represents a 33% Improvement. This was the result of higher commercial military and law enforcement volumes favorable commodity and operating costs lower year-over-year pricing partially offset these improvements 2019 also marked the first year-over-year increase in annual adjusted ebitda since 2016, which was the last year of surge buying in the industry. This Improvement was driven primarily by a reduction in commodity and operating costs lower operating costs result of ongoing cost reduction efforts in the business.
Moving now to our outlook for the full year twenty-twenty which is on slide 9 as you all know Owen is a primarily a commodity chemical producer with limited ability to break fluid pricing in large global commodity markets given the uncertainty surrounding pricing for our chlor-alkali and epoxy products and the significant and Rapid impact that price changes can have on our earnings Olan will no longer provide annual adjusted ebitda Titans. We will continue to provide our planned maintenance turnaround cost schedule pricing sensitivities for certain commodity chemical agents and other key metrics which are included in the appendix section of our slide presentation. We do expect the week underlying demand fundamentals in our chemical businesses to persist through at least wage first quarter of 2020. We were entering the year challenge by lower chemical pricing January 2020 pricing for caustic soda, ethylene dichloride and other chlorine derivatives wage.
Well as epoxy resins are.
2019 full year averages if these levels our prices are maintained throughout twenty-twenty. The impact of pricing on twenty-twenty results compared to 2019 would be in the $250 range.
During January, we have seen demand across our chemicals portfolio consistent with fourth-quarter levels. We expect lower raw materials in both our chlor-alkali products and vinyls and epoxy segment wage to be in 2020 compared to 2019. The lower costs are related to electricity. Ethylene Benzene and propylene. We will continue to focus on the vegetables within our control by working to reduce operational and administrative costs and expect them to decline in 2020 compared to 2019. We are also anticipating an increase in wage contribution from our Winchester segment primarily driven by The Uplift from the Lake City us our Army ammunition contract beginning in the fourth quarter of this year as we have previously discussed our Winchester business secured a multi-year contract with the US Army to operate the Lake City Army ammunition plant in Independence, Missouri upon completion of the one-year transition. We expect
This multi-year contract will drive a significant.
Increase in annual profitability for Winchester starting in the fourth quarter of this year. We estimate increased annual revenue of between 450 million and 550 million dollars and responding increased in annual adjusted ebitda of forty to fifty million dollars. I would like to underscore the long-term out now like to underscore the long-term out for a chemical businesses, which is on slide tent in spite of the this is we're currently experiencing we continue to believe that market fundamentals will be supportive and bolstered by long-term structural forces in the chlor-alkali supply and demand. In fact, we continue to believe that there will be demand growth for the chlor-alkali sector on both sides of the ECU month to date there has been minimal Global capacity additions and announcements of additions to meet this productive projected demand growth and as a reminder in December all in the announced chlor-alkali wage,
Capacity reductions the US will continue to enjoy a sustained energy and feedstock advantage over the rest of the world current industry economics. Do not support world-scale chlor-alkali cash Investments and ultimately over the long-term supply and demand balances will tighten resulting an upward pricing momentum for Owens caustic soda chlorine and chlorine derivative products am literally in the epoxy business. We see global demand growth and minimal capacity additions.
Before I turn the call over to Tom.
I'd like to emphasize that Owen remains on very solid Financial footing in 2000-2001 expects to generate positive cash flows after the payment of the normal, we dividend and before the one-time investment said toggle discuss and this is tsums the full-year negative impact of no change in the current product pricing and no positive cost offsets with that. I'll turn it over the top.
Thanks, John and good morning everyone. Let's turn to a full year 2019 cash flow detail, which is on flight eleven. We generated approximately $250,000 of free cash flow and 202019 starting with our adjusted ETA of 941 million which is which is in the far left of the waterfall chart. We deduct $36 in cash tax payments which are almost all attributable to earnings in foreign jurisdictions column three reflects our Capital spending of $386, which includes annual maintenance Capital spending and the investment associated with our multi-year information technology integration project of approximately fifty six million as we've previously discussed in 2017. We began a multi-year project to implement new enterprise resource planning manufacturer.
an engineering
Systems across the chemical businesses the project includes the required information technology infrastructure. Now turning to the fourth column one-time items include Information Technology integration cost and cash restructuring costs of approximately a hundred million dollars. This includes approximately $49 million of it integration project cost just talked about and approximately twenty-eight million of duplicate. It costs being incurred during the transition. These costs were partially offset by Twenty million dollars and pre tax proceeds from the sale of an investment in a non consolidate affiliate during the first quarter the next column represents our cash interest expense for 2019 as of December 31st, we had approx 5% of our debt and variable interest rates in the next column. We had an eleven billion dollar decrease in wage.
capital in 2019
Primarily as a result of lower accounts receivable attributed to lower level of sales in the fourth quarter of 2014, which was offset by reductions in the sale of receivables under our factoring program and the far right column. We had 252 million dollars of free cash flow.
Now I'd like to move to ohlins investment requirements in 2020, which will review on slide 12.
In order to complete several initiatives to improve long-term cash flow for Olin 20/20 will include Investments that are outlined on this Slide the final Ethel payment of approximately $493 million a year in this will provide ethylene producer based economics needed to supply the new vcm contract which will commence at the beginning of 2021 a total of approximately 110 million dollars for the capital project cost and duplicate i, t cost being incurred during the transmission of our multi-year information technology integration project. This project is winding down by the end of 2019. Approximately 35% off Owens chemical users were successfully converted to the new systems during twenty-twenty. Most of the remaining chemical users will be converted to the new systems dead.
We'll expect.
Refinance the high-cost bond, which were assumed during the 2015 Dell acquisition and will become available in the fourth quarter of 2020 with a call Premium of $1,000. Finally Poland will incur transition costs and working capital Investments required for the new Lake City US Army ammunition contract when finalized these necessary and value-creating investments will be a catalyst for improved cash generation beginning in late 2020 and fully back in 2021 N Beyond regardless of the market environment the cash flow benefits or highlighted on slide 13.
In 2021, we expect incremental annual cash generation of approximately 250 million dollars from the initiatives that I just discussed with the refinancing of the high-cost bonds are expected to reduce interest expense by fifty to seventy million dollars annually.
wind
Down of the multi-year information technology project will save approximately 110 million dollars between capital and expense.
The vinyl chloride monomer contract which is transitioning from troll manufacturing Arrangement that's been in place since the acquisition to a direct customer sale agreement beginning on June 1st of 2021 the vcm, the vcm facility is one of two operations that has the most significant impact on our products and vinyls result of the four-year effect of the new Lake City US Army ammunition contract and finally one initiative announced in December and was not discussed on the previous life is the expected $75 billion dollar reduction in operating costs from the permanent shutdown of a clerical I plant with a capacity of 230000 tons off and Owens. Vanilla Dean chloride production facility in Freeport, Texas. These closures are expected to be completed before the end of 2020 that these closures wage.
Wow, and optimize is cooperative.
stations and cost structure in Freeport, Texas
35 million not $75
PLS cash flow enhancements of approximately 250 million dollars provide significant incremental cash flow to Olin independent of Industry conditions off now. I'd like to conclude with all those priorities for free cash flow, which is on slide 14.
During 20/20 our priorities for free cash flow will be returning Capital to our shareholders who are quarterly dividend refinancing. The high-cost debt wage 2020 and funding the essential Investments required to enhance our businesses that we just reviewed finally on on Friday, January 24th, board of directors declared a dividend of $0.20 on each share of old and common stock. The dividend is payable on March 10th 2020 to shareholders of record at the close of business on February 10th 2020. This is the 373rd and 2nd of quarterly dividend to be paid by the company operation. We are now ready to take questions. Thank you. We will now begin the question-and-answer session to ask a question. You may press one on your touchtone phone. If you are using a speaker phone, please pick up your hand.
Set before in the keys to.
Are you a question, please? Press * then two at this time. We'll pause momentarily to assemble our roster.
And our first question will come from Neil Kumar of Morgan Stanley, please go ahead. Hi. Good morning.
I know the one invited, you know, you mentioned that generate costs and prices and approximately 15% below the average 2019 price. Can you just give us a sense of what type of either ahead when that could translate to some choices remain at January levels? We made a comment in just made a comment in the remarks. It said if all prices that we we discussed which was caustic c d e c h c l and then epoxy resins remained at current levels throughout the year. The negative impact would be approximately 250 million dollars. Thank you. And thank you know you talked about some Cost Containment production activity initiatives in 2019 to offset the cost price and leases. Can you just give us a sense of some example of this and what initiatives you have in place or Twenty $20 in addition to the plant closure that you would use your cost by 35 million.
What we talked about pretty sick.
Can Capital you know if we look at the balance sheet, you know accounts receivable, for example, the clients $16 million you over a year or about 2% Looks like page were up. Can you speak to those line items in the context of you know, the the relatively large price declines that you Quantified in the prepared remarks what why did not see more of a change their Kevin a good question in receivables. We do we do Factor our receivables. So some are sold Soul by year end to your end directionally you're looking at about 70 million dollars in less receivable sold. So when you factor that in to the equation receivables was actually down fairly consistent with the sales change and accounts payable and you see inventory is down as well. Those are much more birth.
See, thank you for that clarification.
And our next question will come from Don Carson of Susquehanna Financial, please go ahead thank you John seems you're kind of in a situation where you know chlorine demand is strong caustic demand. So with with curly restocking and domestically boosting chlorine demand, how do you see industry operating rates in oil and operator operating rates in in chlor-alkali for the first and second quarters of a year-over-year basis.
What I'd like to do is answer that historically we We Believe from the time we made the dial acquisition through the end of 2018 ohlins operating rates were actually slightly better than industry in 2019. We believe that reversed we have a significantly larger exposure to the urethanes chains both MDI and propylene oxide producers off and then we do to the vinyls change. So I believe in 2019. Our operating rate was probably a little bit lower than the industry and I would suggest that based on what we've seen so far in January. I will continue early in 2020.
And then just switching to a poxy so so given the level of demand and we're Roz are is is the fourth quarter even of you know, roughly thirty-six million is that it kind of a good run-rate wage quarter as we go through 2020 or do you see any potential upside? The run-rate is heavily influenced by turnaround schedules. I would suggest based on the turnaround schedule a forecast that you're going to see a week or level in Q2 and then seasonally we typically see Q3 be stronger and I would say if you looked at the pattern we song in 2019. That's a good pattern.
And final question just on Winchester you've talked in the past about a lot of Channel inventory and customer inventory. Where do you think we are in that right now is you think we're at the point where in December small-caliber shipments can actually equal final ultimate demand. I think we saw that developing as we moved through 2019. I think the one wild card that she has faced is the withdrawal of Walmart from certain in Industry categories specifically pistol ammunition and honored sporting rifle ammunition wage, which they essentially exited the business by December 1st and sold out their entire inventory. So I actually think we saw some purchasing at the end of the year in excess of what we would normally see and we're going to see inventory replenishment, but it's not at Walmart. So the the what I'll say is the view is a little muddled at the month.
Thank you.
And our next question will come from Frank minutes. Fermium research, please go ahead. Yeah, good morning folks listen regarding the chlor-alkali shutdown announced in December. So hoping I might talk a little bit more about the thought process behind that. I guess I'm assuming that's that was on the higher end of your cost curve. Do you anticipate, you know other shutdowns either by yourselves or by God by the competition? Well Frank we announced that is part in concert with the shutdown of a chlorine derivative, which we've seen just declining demand to the point where it does make sense to run the plant and that just gave us the opportunity to shut down the chlor-alkali plant that feeds it or on the site. And actually we creates less demanding. I'm not sure I want to comment on what other people are going to do. We're we're going to manage our system to optimize our costs and if we get into place where plant wage
No sense from an economic perspective. We will take action.
Got you. Got you and it just curious. I mean, I know it's very early days with respect to the coronavirus but it seems to be a topic that comes up everywhere and you're just my gut would suggest that old and my life ta a beneficiary in terms of disinfectants et cetera. Are you seeing any change in purchasing patterns with two with respect to the coronavirus off? Yeah Frank, this is Pat. Listen, you know, first of all, I think it's important to remember that our exposure is old and is very very small China represents less than 5% of our revenues. You know, we do have we do have an epoxy plant over in China the serves mainly our Downstream markets and this facility is currently down as it normally is this page of the year and will start back up next week. So really at the moment back to your question, we haven't really seen any direct impact to our businesses, but you know, we're monitoring that and wage.
A very close to see if it could benefit us, you know on the court.
Inside is this about? Yeah. No, I I would have anticipated that you would have seen bleach sales in chlorine sales move up, but at this point it's too early. It's too early to make that call. Yes.
All right. Thank thank you so much.
Our next question will come from Mike Tyson of Wells Fargo, please go ahead.
Hey guys, good morning. When you talked about the 250 million negative for pricing in 2020 of prices. Remain at fourth quarter levels. Is that more front page is it does it primarily hate you in the first and second quarter any thoughts on how that how that flushes through? Let me clarify something that's based on the that 250 is based on the pricing. In January not for the quarter and obviously if you're looking at your over your comparisons the Gap Narrows as we move through the year.
Okay, great. And and just yeah, I know it's tough to the forecast and and predict but what do you think needs to happen to to get some momentum in encaustic prices as the year unfolds Mike. This is Jim. What we really need is we we need that the industrial production side of things to to grow. We would love to see a pick-up in the automotive Market also the some of the aluminum markets like Aerospace aircraft commercial aircraft and so forth and if we saw those pick up that would obviously start to rebalance things between between clogged and caustic side.
Great. Thank you.
Our next question will come from Jim Sheehan of SunTrust, please go ahead. Thank you. Good morning a question on your earnings power. If we look back at 2014 your life form was a billion dollars since then the caustic soda index prices are up a bit in chlorine and EDC prices are down but natural gas prices have dropped from around $4 to $2.50. That should have given you a net ebitda tail wind and then when you consider a cost synergies of 250 million dollars and revenue synergies on top of that you should have been able to generate about one point three or one point four billion of you but in 2019 based on your sensitivities, but you did to 941 million in 2019. That's about sixty million dollars below the level of pro forma five years ago. How do you explain not being able to grow over 2014 pro forma?
I I would say I think you've thrown a lot of things out as there and I I would prefer to write down what you said and get back to you on that point cuz we're not going to break down through the pro forma and all the differences that I'm not saying you're wrong. I'm not sure exactly about veracity of everything you said.
Okay fair enough now, it looks like your ibadah is declining in in 2020 at the current price levels, which means your net debt-to-ebitda Dead Rising if pricing continues to erode are you in any danger of tripping debt covenants this year Jim is you know in December we bought our bank agreements that expands our leverage ratio for the next 2 and 1/2 Years to you know, which should enable us to ensure a level of compliance and you know, so we we would expect that we will be fully compliant including the investment outflows in 2020 with our bank with our bank agreements and don't forget about the 250 million dollars of incremental cash flow that starts in late twenty and and and is full bar and twenty twenty-one.
Thank you very much.
And our next question will come from Matthew Blair of Tudor Pickering and Holt please go ahead.
Good morning. Thank you. John. You mentioned that the pricing environment was clearly pretty tough in Q4. Could you just provide some commentary on just overall volumes and I'm just overall demand Trends as you progressed throughout the quarter. Would you say that that December was either stronger or weaker from a volume standpoint compared to October off? Well, October and October we had some turn around. So that's not a valid comparison. I I would say that what we saw in December in the fourth quarter generous was quite a bit weaker than what we saw in the third quarter and that was across the spectrum of chemical products.
Got it. And then any thoughts on EDC supply-demand, it looks like several new EDC plants in South Korea and China this year could raise glass capacity by over 3% Um, what what do you project for demand? And is there a concern that EDC might weaken as you progress through the year? I I don't know. I'm not going to forecast what it's done going to do. What I would say is we've actually seen in January and February and as we look at March 10 a.m. Pick up in terms of demand and pick up a little bit in terms of pricing.
Thanks.
Our next question will come from Eric of City, please go ahead.
Hi, good morning. John morning.
So us export prices for caustic soda have declined to you know, two hundred to two hundred fifty dollars per tonne. Can you just talk about the Arbitrage windows that are still existent for you and talk on how you're seeing transport costs developed?
Obviously the best Arbitrage rolling is to stay out of the the straight export market and I would say when you look at those prices those are not prices that opened sold at home best situation is to continue to export if you will into Latin America where we continue to build out a distribution system and where we get prices significantly higher than what you see in the export Market.
Okay from my second question competitor recently announced epoxy price initiative. Have you done the same and then broadly could you change your strategy to go more Downstream to support that near-term earnings Target of $250 million ibadah.
Yeah, Eric, just a couple of comments. First of all, we had increases out there in January had very modest success with that. We do have increased down there for February as well and your last point, you know, we do continue to to build our Downstream businesses around formulated products around wind and change a few other areas. So that is a part of our strategic thrust as well. But I want to emphasize we are at our core chlor-alkali producer, which means we are going to stay in the LifeStream of the epoxy chain. That's where our strength is and that's what we're trying to Leverage.
Thank you.
Our next question will come from Mike ahead of Barclays, please go ahead.
Thanks guys. Good morning. Good morning. Good just two quick ones on the input side of the equation first on your chlor-alkali sensitivity table. I noticed you had a job where you mentioned there might be some impact to the sensitivity because of your hedging activities for inputs. So I guess can you just give us a sense of the level of cost-benefit you expect to realize in life since my guess is it's probably less than what the sensitivity would imply given where natural gas prices are today.
This is Todd if you as you as everyone on the call knows where a hedger we do hedge gas, and for ethylene needs, you know, I'm on our rolling, you know for fourth quarter basis. If you look today at where our hedge position is for natural gas and athlean wage for 2020 as well as a current Futures number for for twenty twenty. You're probably looking at good news year-over-year 20 vs. 15 + 40 + million dollar range.
Got it. Okay, that's helpful. And then to tie in with that you mentioned earlier kind of that rough 250 million dollar headwind number on pricing. If we run right January number is that net of this benefit from cost reduction or is that just purely run-rate engrossed pricing that is run rating gross pricing. Okay. Perfect. Thank you. And our next question will come from Steven Byrne of Bank of America, please go ahead.
How you meet some comments about the supply and demand in balance on the chlor-alkali Chain that's leading to the the lower price encaustic, but yet pricing on the chlorine derivatives are not very favorable either. Is it your view that chlor-alkali in in the street is too fragmented for Monday for there to be any, you know, idling of capacity to to tighten this Market Up and Drive pricing up.
I don't believe that at all. I think if you looked at the industry operating rates there in the mid-eighties, so we're just we're suffering from two things. We're suffering from lack of em were all demand and then the imbalance between chlorine and caustic at less than optimal levels.
Well, maybe an extension of this then on the on the epoxy side you commented about some of the end markets being weak and yet your volumes went up is that is a logical to push more volume in a declining price environment or what? Do you have the ability to tighten that by cutting back on production rates? Yeah. The thing I would point out is that in 2018. We had two very significant 60-day turnarounds one at our plant in Europe went at our plant the United States. So the 2019 volume increase would have been expected under all circumstances.
and
I have one question on you know, your sg&a expense you it looks like you trimmed it in 2019 versus 2018 and perhaps that is a reflection of the headcount reduction that you mentioned earlier. But if you go back to you know, a few years post the acquisition from doubt sg&a expense was lower what what has been driving up to more than offset the the cost synergies from from that acquisition Steve. This is Todd one of the big items that runs through sg&a that gone up from I'll say 2016 early 2017 levels are the costs associated with this it integration project. And that number was about you know, seven seven million dollars in 2019. So, you know if that's the Big Driver from what your reference, you know several years ago, but you know dead.
Janae was down.
And 19 vs. 18 in spite of forty million dollars of higher it integration costs year-over-year. It was legal Consulting incentive system is conversation. I mean, it was lower cost generally across-the-board. And again, we keep emphasizing that project is is scheduled to conclude at the end of 2020 and we talked about five hundred million dollars of less spending in 2021 split between capital and expense. The expense piece of that is part of the g n a
Okay. Thank you.
And our next question will come from us on a Min of Olympic Global, please go ahead morning guys, you know, you guys were kind enough to share with us that you know, if we were to mark-to-market pricing, you know entry level it would be around 250 million dollar even hit now. He's you know, obviously we've seen crude oil prices and crude lengths or the raw material prices come down a fair bit. We've seen similar sort of Dynamics happened on the net gas side of things. So, you know, what would that number ebitda sort of benefit wise look like if you were to mark-to-market Rose where they are currently in January obviously taking into account, you know, the hedging activities in the light to mention what we sat in the remarks qualitatively we expected raw material costs in both chlor-alkali an epoxy to be down Todd. Just gave a number associated with dead.
natural gas and ethane of
Forty to fifty million dollars and I can tell you on the epoxy side. It's a similar number to that and there are some other benefits coming from that.
Understood understood very helpful now moving on, you know in Q3, you know during the conference call you guys talked about sort of continued. He's talking and caustic. I mean the pricing sort of sliding more I would imagine that sort of these talking continued through Q4 as well. So where do you see sort of Industry inventory levels right now?
This this is Jim. I think you're correct from a customer standpoint within a declining price environment. It's natural for them to run inventories down and that started you know off as early as the third quarter and moved through the end of the year. So we believe that customer inventories have have have moved down. I can't really speak to you know, produce our inventories. All I can say is that off Holden's inventories are lower at the end of the year than they were in the third quarter.
So much better.
And our next question will come from Jeff Secaucus of JPMorgan, please go ahead much you're you're shutting down a chlor-alkali plan a VDC plant. Can you talk about the chlor-alkali plan on being two hundred and thirty thousand tons? Maybe the VDC plant life some caustic soda, and maybe you're not running at a high rate if the plan you're going to shut down. So what's the net capacity closure really for the industry in a shutting down of those units and do you plan to shut them down in the first half or the second half?
The capacity around chlorine and caustic soda is as we stated two hundred thirty thousand tons. We plan to shut these down in the second half of the year or we have contracts on either side to run out and that's then we'll be shutting them down.
Okay, and when you totaled up your I think it's a hundred and five million in transition costs an additional working capital for Lake City and bought a 2020 it would there be more in 2021 in terms of building working capital or or would we be done? I'm assuming that the the business level at Lake City from the Army remains at a constant level we would be done.
Okay, great. All right. Thank you very much.
And our next question will come from a rune. This one is Nathan of RBC Capital markets, please go ahead.
Great. Thanks. Good morning. You guys deleted the the price impact around 250 million, but just curious on the on the volume side last year when a guidance in Q2 and Q3. You thought that volumes would provide an over a hundred million uplift in the second half. I guess did that materialize and it's not it's not something that we could look forward to when you know markets recover that did not materialize. We said that the economic climate for us we can throughout the year and that accelerated in the fourth quarter. So I I think from our perspective especially if you look at some of the chains we serve on the chlorine side urethanes, we would hope very much that there's a potential kick in 2020.
on a volume and then active
Great. So just you just going with that, I guess in the past you provided, you know different walks to mid cycle, even in 13215 range Affiliated manually, but life is that I guess still within the realm of possibility, you know, and what would it really take? You know, it seems like there's been you know, not a large amount of money in Caracas. You guys are potentially shutting down a facility or are you know, I guess are you are you surprised at all that you know pricing has been so difficult in many of the products, um, you know, especially since you know if Supply is tight right now in your your soul. Able to achieve some pricing, you know, I know that demand is obviously been week but if anything other than week 2 minutes realizing a resulting in this this week price captor, thanks from our perspective. We believe it is weak demand that is driving the birth.
Driving the prices down.
You asked what we would take to get back up into the billion 1 billion to we talked about we experienced 450 million dollars of negative price on caustic soda plus the Applause president in 2019 versus 2018. And if I add that back to the 2019, we actually exceeded 2018.
All the things being obviously they're not but right and then just just lastly just going back to the industry structure question. You know, I guess why wouldn't be any further transactions, you know, when I look at offering race, I guess in the mid-80s, you know, and then the the potential for relatively attractive North American production base wage. Um, it would seem you know, that that some players may want to be permanent emotional standpoint or whatever. It is in the cost that can you put some more consolidation. Do you expect more consolidation in the space age? And would you be in a position to drive that fixed? I think it is from our perspective highly unlikely that all and given its current market share in North America could participate in the consolidation.
Thanks.
And our next question will come from John Robert of UBS, please go ahead. Thank you back to Frank's original question on China. Would you Hazard a guess as to how much of the cost of capacity and epoxy capacity and China's operating at below normal rates right now.
This is Jim. That's a pretty tough tough call to make I would say that there's a you know, they did extend the Chinese Chinese New Year. They extended that and they do have that plant the plants down. I can't give you a a number on that but I would just say that there's there's obviously more shut down than they're traditionally is even though you're in the winter time periods. That's that's about as long I can do John. Okay, and then just the account in question here taught on the $75 million for the vcm contract change. I assume that's primarily the expected margin on the Ethel that you're going to get. What's the revenue change associated with with going to consolidating the BCM sales and how much depreciation do we put against that said five million? Can we just take the $400 and straight-line it over twenty years.
I'll start with the
Back and work my way forward. Yeah the score 93, you know, / 20 will be the amortization. That's right. We've not given a guide on Revenue, but the revenue effect will be that will be higher than the $75 million that that is clearly a net number.
Okay. Thank you.
As there are no further questions this concludes our question-and-answer session. I would like to turn the conference back over to John Fisher for closing remarks, please go ahead. I'd like to thank you all for participating in our call today, and we look forward to talking to you at the end of the first quarter. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.