Q3 2020 Olin Corp Earnings Call
Good morning, and welcome to Olin Corporation's third quarter 2020, <unk> earnings Conference call, all participants will be on listen only mode.
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I'd now like to turn the conference over to Steve Kina Olin's Director of Investor Relations. Please go ahead Steve.
Thank you Greg Good morning, everyone and thank you for joining us today.
Before we begin let me remind you that this discussion along with the associated slides in the question and answer session that follows well include statements regarding estimates or expectations of future performance.
Please note that these are forward looking statements and that the actual results could differ materially from those projected.
Some of the sectors that could cause actual results to differ from our projections are described without limitations in the risk factor section of our most recent form 10-K, <unk> third quarter 2020 form 10-Q, and then yesterday its third quarter earnings press release.
A copy of today's transcript and slides will be available on our website in the investors section under press events.
The earnings press release, and other financial data and information are available under press releases.
With me this morning are Scott Sutton all.
Well, its president and Chief Executive Officer.
Dawson Executive Vice President and President of party in International.
Barack <unk> executive Vice President and Chief operating Officer, and Todd Slater, Vice President and Chief Financial Officer.
We will begin with brief remarks, and thereafter, we'll be happy to take your questions.
I'll now turn the call over to Scott Sutton.
Yeah, Thanks, Steve and Hello to everybody you know I've been olin's CEO for a couple months now and I can tell you that I'm, just playing lucky to be here and this great company and working with his passionate team.
In fact, I'd ask you to watch carefully what this team has got to do with this company.
It will surely be exciting so my role is to lock arms with this change and when our way back to a much higher equity value.
So let me start my comments with slide number three in the presentation and an update on market and business fundamentals.
Look I would say the summary is that global industry fundamentals are still intact, though currently pressure by Converdyn chain.
In our chemicals business the supply demand balance is expected to push back toward the man as always limited meaningful supply additions are foreseen on the horizon in fact, 80% ish affective industry utilization rates with a sophisticated player.
It's a really good place to be as long as that players focused on driving valley. So.
So we are not player we're going to be that leader I mean for example, competing in a way that represents the value we bring to the market as we will discuss further today.
In our Winchester business demand in the U.S. far outstrips supply because of long term positive demand attributes sporting participation new firearms owners in self defence readiness is way up north.
Military programs have multiyear growth needs under long term commitments I mean, we are the absolute small caliber ammunition later [noise] in.
In fact, you know I'd say that under John Fishers leadership Olin is built Undisputable number one global leadership positions in every single business core alkali approximately and Winchester and.
That you should look for from our winning model, particularly from the number one foundational element of exercise and our leadership include that we will start talking about how old and can decrease the value of the EC use sales.
And we will measure that through and Owen E. C. U profit contribution index. This type of VCU metric is the best indicator of our success I mean, it's really the number one indicator of our success and that's what all and dusts increases returns on Ecu's and we are the cleared.
The leader.
Merchant caustic soda is only one element of our business, maybe up to 25% by sales 19 prospect of Lee.
In fact, and really as a side note caustic is certainly not a singular driver there are no independent caustic dynamics, if the caustic market quality is exceptionally poor we might back down caustic and change our trading in inventory mix, resulting in slowing.
Flooring chain sales in order to maximize the overland <unk> value as we proactively manage our landscape.
We will be sharing that each you profit contribution index with you quarterly.
In fact take a look at slide number five now and it will represent the unit contribution value of chlorine and caustic soda through our complete and broad derivative chain, even including a boxing and of course, including merchant sales of chlorine in cost stick to.
Our index will be used to set and ever rising floor on the unit E. C. U profit we will accept.
It is the number one marker of us resetting business value and exercise and our leadership and it covers about 75% of this company's total business.
You know a companion discussion is that unfortunately, some industry trade indices have come to be thought of as leading indicators of our business. We plan to make them a trailing indicator only as we control our own destiny.
We will do this by shifting more of our business to be price on our freely negotiated basis and negotiating negotiating directly with customers for our valley.
We just don't feel the industry trade indices represent the full value we will transact that.
Our view of a timely example of this is the myths of but North American Corrine pricing by an index here over the last month.
Obviously this unwinding from some industry trade indices gives us more ability to positively control.
The whole and ucu profit contribution index as.
As a point of reference in Q3, we sold some railcar corrine at the highest price since 2003.
And we lifted some spot EDC pricing by more than 10 times the queue too low price in early queue for we just asked for and received the largest Winchester commercial ammunition price increase in many years and this comes on the heels of two other.
Successful commercial price increases this year.
So what's the expected outcome from our new unique winning model.
Well this is on slide number six.
Oh of course, we're thinking in terms of multiples of our current equity value, but in terms of 2021, you should expect us to target inhibitor margin roughly in the mid teens composed of the following elements.
One is expected $100 million of improvement from confirm items. So that is our lake city or mute army ammunition contract, an operation and a new V C M needle.
Another expected $100 million of improvement over 2020 from not repeating the second quarter Covid shut down.
Additionally, we expect up to $100 million of net and that is net.
Productivity savings as our gross actions more than offset inflation pressures and the big one is up to $200 million expected from our acceleration of leadership activities as I just previously described.
So our levered free cash flow and so that's after all of our capital spending.
It was Jane in the plural vinyls Jane.
Terms of all the golf ballistic nature, and the like and you know as I sort of sit there and think about the evolution of Theosophy use chain. You know there was a step change in profitability over their call. It you know from 2011 2012 onwards.
And you know if one thinks about you know some of the strategic changes that you know would implemented you know I broadly think about four silos. You know there was a utilization rate management that was exercised doing more with the network cause you guys just to call it feedstock optionality and commercial flexibility.
And it seems all of those things are pretty applicable to chloral vinyls and it seems that that's the direction. You guys are headed so is it fair to assume that each and every one of those things can be hit and there's 50 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.
Yeah. Thanks.
I guess, what I would say as well I mean.
Gotta go out.
Winning model.
Some parts. The main feature of it is we're going to exercise our number one position.
So.
How are we going to do that we're going to be interacting with global supply demand, we're going to be impacting our.
Global supply demand and.
That means we're going to be searching inventory and when it's appropriate really seen inventory and what is appropriate we're likely to do more training as we range and the pockets of global liquidity that are already out there.
We're not going to be selling and.
And the poor poor quality markets and when we do that we're going to be overlain.
Price increase in that lets us opening clothes arbitrage windows. So that's the main elements of how we're going to go out and manage our landscape.
Saw it underneath all that will 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 get the best deal in place that every customer.
Overlay and 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. It we should run at so where are we going to set RTC.
And know that three months in advance. So it really contains a number of elements right you've got that umbrella awareness that already.
How we manage our landscape and then our Hedgie commerce activities. So.
That's what it sets up for in the future Assad I expected to bring more but the numbers quoted.
Very helpful, Scott and as a follow up on the near term side of things.
You know obviously you touched on the chlorine price hike that has been announced.
So question is that how sustainable do you think in the near term that price hike is keeping in mind some facilities in the U S coming back on line and then chatter about <unk>.
Brazilian facility on the floor outflow side coming back online as well and part and parcel with that as we're talking about some of the pricing moves on the wrong side of things. How are you guys thinking about the recent move up that we've seen in natural gas prices.
Yeah.
Some are Saddam for our business right, I think sustainability and materialism of that that korine price increase or.
If you looked at our portfolio certainly in our small amount of spot business we've achieved.
Price increases and more where we have contracts negotiated every month I would just say say that we've generally achieved it as well some customers have not picked up all the volume they normally do and I would say even further evidence of Amazon is that where we have.
Contract business on an index and we have.
Caps on the amount we have to supply, we're actually able to get some premiums on volumes about those cat. So for US, It's really society sustainable as far as your second part of that where it is natural gas tight goes I mean this is out of all the inputs.
This is the one that we have to go out and recover and I think this model is being able to do that.
Very helpful. Thank you so much sharp.
Our next question will come from like Susan with Wells Fargo. Please go ahead.
Right to your lungs.
It'd be muted.
On your own.
Yeah, sorry, guys I apologize about that Scott welcome back and look forward to working with you.
In terms of exercising your leadership position and correlating that with the E. C. U contribution index, how do we think.
Your variables or your actions will change, depending on where that index sort of lives.
So yeah.
Yeah, well, thanks, Mike and of course, our intention is steadily move that index overtime and yes, there could be some some quarters, where it flattens.
But the reason it's the number one indicator of our business. It represents value per unit more than anything else and clearly the risers multiple things that go into our value equation you have the the unit contribution which this index represents.
You have our volume and you have our fixed costs right. We can talk about what we're doing on fixed costs and productivity and a bit in general comment on a question on that that later.
Will be watching volume carefully, but once you lose unit.
Contribution across something that represent such a large part of your company. It can take you months and years to recover it. So here's what you should expect us to do you mind, if some parts of our whole E C U value chain, whether it's hot courting derivative side or the caustic side.
Is showing bad quality out there in the marketplace, we're very likely to withdraw right or slow down inserting material into such a bad quality market for us and therefore, the repercussion of that will be that it'll likely shortness.
On the other side and we will have to decide what derivatives, we're going to put it in and we're going to put it into the derivatives with the best opportunities for Owen. So that's one way that it'll guidance.
Got it and then when you think about that 50 to 200 million those are drivers for Oh for 21, right and and so what do you think that potential is over a cycle over the next five to six years and then it doesn't seem like there's any major capacity coming on so.
Maybe maybe your thoughts there over the next several years.
Here's here's what I would say to that I mean first of all global dynamics only get that right. I mean demand is going to continue to increase there's no meaningful supply.
Coming online and therefore, the application of already model only gets better as well as far as we were going I would just refer back to our Investor day at the start of 2019, where we said we had a couple clear milestones being a bill.
Okay.
One $5 billion of it, but and then $2 billion of it but.
That we will pass within the time frame that you asked about.
Great. Thank you.
Sure.
Our next question will come from Kevin Mccarthy with vertical research partners. Please go ahead.
Good morning, Scott I was wondering if you could address you're go to market strategy around the E C U.
And some practical terms so for example.
You know would the mix of contract versus spot business <unk> and to the extent that you have contracts.
Would the percentage linked to benchmark assessments go down and then finally.
What do you think what are your initial thoughts about price protection. It seems that convention in the industry has been that many large buyers enjoy quarterly price protection. When do you think about quarterly versus monthly versus spot.
Yeah. Thanks, a lot for the question, Kevin I mean, what I would say that those three things that you asked about I mean favorable absolutely all evolve to be much more open and much more freely negotiated because in order to be effective to run this kind of model right. We've got.
To have knobs that we can turn that are totally under our control every every day riots in a central component of that so today, we are much too heavily weighted toward having contracts that are tied to perhaps an external industry. So we're going.
To be working.
Reduced fat right and we're going to try to even pull forward some of that work because we have the ability to trade getting control over that knob today forgiven customers security of supply out in the future and that allows us to open up contracts that you might.
Bank that we couldn't otherwise open up.
And as far as our sort of go to market.
Strategy and view right I'd, just like to point out that this this is not just a commercial business strategy by the way. This engages the whole company and you know you.
You may have heard me during the first Q&A that we had talk about all those activities. It takes to effectively manage our landscape and interact with global supply and demand in a positive way. So it takes every support team and this company to be.
Coordinated on that in the real business that we're running here is lifting people's in teams and connecting them to this wedding model.
That's very helpful. And then secondly, if I'm <unk>.
Would you comment broadly on.
Your expectations in the fourth quarter as it relates to seasonality against the current market backdrop of many supply dislocations across the industry. How do you think volumes will play out relative to a normal seasonal pattern.
Yeah, and how we're going to go a little bit about what we put in our in our press release, we're going to see a little bit of that.
That's not honestly, a real big factor I think the bigger volume factor is that.
Choosing not to participate.
Poor quality market, there certainly for caustic or participate as much as we normally my wood. So that's going to be the bigger volume hit two has been probably the inventory reductions are at the end of the year, but it's not bad in the in the fourth quarter in terms of supply and demand.
Okay. Thanks, so much.
Okay.
Our next question will come from.
Mitch with.
Mhm research. Please go ahead.
Yes, good morning, a skunk and let me echo the congratulations on the new role in a in a chance to reconnect.
Clear, yeah, clearly pretty fairly dramatic changes with respect to have chlorine is is treated at all and so I was wondering if you could update us on on your ability to flex between captain and merchant on on chlorine in and with respect to merchant some of it is.
Railcars some of it is pipeline and you know I would assume that the pipeline side might be might have more price protection is there any way that you can kind of quantify some of these metrics here. So we can understand.
How how some of the new changes on flooring pricing actually will flow through for for Roman.
Yeah sure.
I'll I'll start and taught might want.
Joined in here a little bit.
You know for tour and we're just we're heavily weighted.
On contracts that are tied to an index and we have a good bit of business that goes in the pipeline but.
I think we've shared before that if you think about merchant flooring. It's it's around one fifth variety of our total Corey but on the large part that is railcar.
Corin, which by the way rail capacity is certainly.
A limiting factor right right now out there in the marketplace. I mean, we have in our game every day more flexibility if the merchant world doesn't look good as we have the ability to push that back through a number of derivatives all the way out to the end of our policy change.
But I'll, let Todd comments yeah.
Scott.
I would echo the comment about.
<unk> Court reoccurring by rail is very tight in our system and you can see that by lead times that we've implemented over the last.
Over the last month month, and a half and the requirements related to that so I would say Korean by rail is especially type thing.
Gotcha.
Got you understood and and you know just coming back to the the the upside here in the third quarter that you announced.
You know, we'd imagine that some of that some of these indices that you've talked about are showing caustic you know having declined in the third quarter and an expectation that will actually happen here in the fourth quarter as well, but your contract sorry, with a lag in any way to quantify the benefit in.
In terms of the lag that you saw in the third quarter and kind of what your expectations are for constant price realizations in the fourth quarter and Yolande system relative to the third quarter.
Yeah.
I have Ah.
A specific number for the benefit I mean, you're right I mean, we do we do get a little bit of lag. There. So there is some some level of benefit but you know I would also for the speaking about the fourth quarter right I would just refer back to our.
Earlier discussion a little bit there.
It's not about a singular product right almost don't care ride or does it matter because we're going to run our model just like in the fourth quarter and such.
Such that we have a lot of places to get value from and one of the ways, we generate value is not selling into our core quality market and so.
The more the quality decreases.
More we're gonna.
Turn turn that that.
So it's not significant.
Gotcha alright. Thank you. Thank you so much for.
Sure.
Our next question will come from been some Anderson, let's Sniffle. Please go ahead.
Yeah. Thanks, Good morning, everyone. When I think about the 50 to 200 million dollar target.
You know 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 costs coverage things like that you know kind of relative to what you see is easy wins in the near term.
Yeah sure. So so Jones.
Answer the bulk of this question I mean, I would just say that we have broad opportunities across all those buckets for our productivity and it's many small things that are going to add up to a big Bang right internally I like to say, we're masters of both the small on this but I'll, let Joe answer this.
Sure Yeah.
Yes, I would say that you are comment on adding SG&A to add 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 all that every division in every function every site as productivity calls and objectives for not only the coming year, but has had the past years. In fact, just a point of reference we actually have 1100 27 accident.
Projects across the company are geared towards driving productivity and getting our fixed costs and are causing down to be able to make sure that we can pull that lever and deliver on that $50 million to $100 million net productivity.
<unk> that we have so we do have momentum on productivity things like you've heard about our vinylidene chloride asset closure that boring closure that we announced about a year ago or store or so popsy, Nova lack plant. This closing as well so we have a number of projects and so forth.
That will deliver momentum as we head into 2021.
And some are large summer small, but they all add up at the end of the day. So we feel confident about that $50 million to $100 million.
Thanks, Thanks, Jim that actually answered my next question. So I'll try a different one here when you think about your position and kind of globally traded EDC volumes I'm just curious to see.
Do you see that as a as a particularly attractive near term opportunity to maybe smooth out that volatility to commercialization changes or do you have a house view on non integrated PVC expansions that would largely solve some of that volatility through higher demand.
Yeah I guess.
As an umbrella statement right because we're doing.
Broad portfolio management under unique model.
Generally speaking any volatility up or down it's going to be good for older Brian and we're going to be able to take advantage of that.
Specifically for ADC being the largest part yet player Bayer, Yes, we are able to.
Provide a number of activations out there to get the right value. So we are getting value from that and we expect to continue to get some more valley from that.
What I will say I mean, you brought up sort of a P. B C.
Demand versus caustic and so forth.
If you think about our our configuration right now we're not participating in an optimal configuration riotous PVC is exceptionally strong which of course is spitting out a lot of caustic and we are a smaller participant in the church.
To PVC and I guess, the reason I point that out.
Because it's a real testament.
How we're starting to run the company and how we are running our model right right now today, because we're doing okay, even in that dynamic, which isn't our best best dynamics. So we're able to do things with.
You see we had the discussion earlier on flooring in there are some strong parts there and other thermal sets in thermoplastics that it goes into in the inner organics as well so yeah I mean, that's how our models that'll work.
I appreciate the detailed Thanksgiving.
Sure.
[noise]. Our next question will come from Patrick What's the city. Please.
Hi, Scott good morning higher.
Oh and acquire the Dow Corning products business to expand their corrine envelope you.
Where are you thinking that value to be uplifted and captured from those downstream products and now what currently now is.
In your view poor quality or you know low economic return.
Yeah.
I would say that.
It's gonna be across the entire.
Art Folio 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 any more right and we don't have to pump a lot more money into that building process.
So I mean, we have a game plan so start leading using what's already been been built and that's going to be our game plan. So bad.
You profit contribution index gets to whatever one five or two we've got to get up in that range to match. What we said, we do it an investor day, and and we're going to do it as far as areas that were lifting lifting merchant corine is fundamental to this.
Company, and so you'll see us out there doing that that's that's.
That's going to push along and drop many things in fact, all the way through our pox.
Foxy business, which I might ask Pat to comment on here in just a minute at.
<unk> business is one of our downstream businesses that is subject to those core alkali acu winning model and also has its own symbol or landscape management model built in around epichlorohydrin.
At a pox so a potsy to your question is one area that we can absolutely lift margins on and so I'll ask Pap when you when you comment a little bit on that.
To Scott can you hear me yes.
Yeah like you were saying it's.
<unk>.
And around anti chloride, when you know where the only producer of epichlorohydrin now in North American quickly have a major leadership position on at the in Europe as well.
So at the is.
Critical to to strategically what we're trying to do with her a proxy portfolio and then how we monetize nappy in the form of liquid epoxy resin sounded epoxy resin and other ways. We can tell those epoxy resin equivalent.
Into the downstream. So you know back to the plot here I'm not selling into low returned segments applies to a potsy dislike it down and.
And the rest of the portfolio.
Riding productivity Jim mentioned, you know, we just made the announcement to shut down a noble Act plant in North America.
Which wasn't productive and we have other ways to still participate in that market.
A more productive way with our ethnic capabilities in Europe. So you know I think through happy and how we monetize nappy into various channels where.
Where are we select having a sharper a sharper edge on where we sell at the end the liquid epoxy resin is is exactly what we're going to do.
Nice fat.
Great. Thank you and then.
Follow up question is on the leadership position bucket 50, the $200 million you know, it's it's quite a bit of a range. So what is your view you know industry conditions and E. C. U chlorine beginning the increase in price switch.
Leads recoveries and then caustic soda typically bottoms within a quarter to too, but you know consultancies still expect price degradation and caustic soda into an extra so what is your view and you know do you agree with consultants or do you take a different stance.
Well yeah. Thanks for the question I mean.
View is that are you see you value is going to go up right no matter, what and that's that's how we're going to we're going to run our model book I mean, I'll certainly acknowledge that you know we need to continue to give our model more tools.
And more degrees of freedom and that takes just a little bit of time to get it in place, but even even with the degrees of freedom that we have today.
Confident that we can make acu values.
And I think the proof of be in the pudding and R. E. C. U you know.
Profit contribution index, which is that measure.
All all variable margin for all our products.
That used flooring are caustic divided by our total volume.
E C us and I think to some extent, we're we're having to prove that a little bit here and the and the fourth quarter because yeah I acknowledge that you know.
Caustic is moving down in the in the public indexes and we haven't built a plan for next year, that's only based on caustic flattening or going back up right. We built a plan that's based on a model of portfolio management.
Where we can work through any situation and make some of those valleys much higher than they otherwise would have been and make some of those peaks much higher than the otherwise would have been and also sort of shortened the distance between valleys and peaks as well.
Thank you.
Yep.
Alright next question will come from like late head with Barclays. Please go ahead.
Great. Thanks.
And Scott welcome.
I do I do want to go back to the the chlorine conversation and the pricing dynamic.
I guess my understanding is call at roughly a third of your chlorine goes to Dow, which I assume there's not really much pricing flexibility. There. Another third goes into what I would call more pure global commodities like E D C or liquid epoxy resin, where I think placing power's probably a bit ciao.
<unk> on your own and then the remaining third potentially you can drive more value, whether it's merchant marine happy that you mentioned earlier coordinated organics it might not thinking about that fucking of opportunity correctly or kind of where among that for an envelope. Do you think you can drive the most value per se.
Yeah, Yeah, Mike I mean, that's that's that's not too bad, but I would just add a little bit.
That I mean, it's.
While it's not.
A whole are right, it's not far off that goes to one single consumer that is more cost base. So we've sort of taken that out of the equation. It's not even represented in our GCU profit contribution indexes basically the only thing that's on.
Really represented.
There and then you get to the other call it at least 70%.
You know, we recently proven that we're able to materialize price increases there and in many cases, we've got in both of our price increases, we had announced $80 a ton and we followed it up by $100.
And that's all the business that is open so it works the the other part you know a little bit to your point.
Is that where we're priced on index contractually right and unfortunately.
That index completely missed you know the the run and pouring here, that's kinda gonna continue and that goes back to some of my opening comments and yeah that limits us today right. So we're going to be be working to make sure that that misrepresentation no.
Longer takes place.
Got it that's Super helpful. And then a question for me cause a bit of a technical question, but I think important could you maybe clarify how you're treating or accounting for the delta between what you believe oxy contractually owes you under your flooring arrangement and what you've been getting paid no you won't.
Comment on the litigation, but I guess, how has that amount that mountain fully included an adjusted EBITDA and have you taken any bad that allowance on that.
We would not comment.
The amount.
Other than to say, we think we've recorded.
Spews between older than oxy appropriately.
Obviously any resolution associated with that dispute.
Could only be positive from my cash flow perspective, as we go forward.
Okay, I guess just from an adjusted EBITDA perspective that 80 million last year was that included or is that not included.
Permanent adjusted EBITDA perspective, I'm not sure.
80 million would come from I think directionally. The annual dispute is in the 50 million dollar range.
So like I mean, just.
Just to make make sure it's clear right I mean, we've recorded that where we think it should be I guess is the thing we would say, but I do want to clarify me I think Todd said exactly the right Fang right win or lose that right. It's only cash positive for us.
So win or lose that it's only cash positive for us just to give some perspective.
Around that and we haven't.
Said much more than that about it right.
Right, that's what I was thinking stuff sure.
Our next question will come from John Roberts.
Yes. Please go.
Oh, Thank you and congrats Scott welcome back to the public company quarterly earnings Cool.
Thanks, John.
It was it was unclear to me is the issue profit contribution includes variable margin or an athlete since you're contracts are based on cost.
Market price of ethylene and obviously the margin on ethylene is gonna go up and down with energy prices.
Yeah.
And so so John I mean, it includes the variable margin.
Any products that we sell that uses or starts with korine or caustic. So therefore, let's take ADC. As the example is the one that uses most of the ethylene right.
So you look at the sales revenue up.
Of ADC.
Mess, all the variable cost of which you know.
Ethylene is one component of that right and that is the total variable profit that goes into the index.
Yeah, I guess it will go through a little bit more offline as well, but secondly, if you weren't look backwards to the second quarter, where this variable margin index dropped to 92.7 do you have in mind, a pro forma level that new approach might've held it to them.
What might you have done back in the second quarter to not drop down to 92.7.
Well you know I mean, John so it's a little bit of a hypothetical question and I I would say just look at third quarter. As an example, right we were able to move it back up the other way I would try to address your question is that and told that E. C U.
Profit contribution index gets up to around one.
Or two then we're not running this business at a place that represents reinvestment.
<unk> right. So our model has a lot of attention to.
Really pull that up and so that's pretty substantial John I mean, if you think about raising it to 157.
75% of the company's business right that means we have to increase Ryan R variable large a fight effectively 50%.
They are across all those problems. So I don't know if I'm answering your question or not but.
Oh that's helpful. Thank you very much.
Oh next question will come from Alicia, Let's say, yes tomorrow with Keybanc. Please go ahead.
Yeah. Thank you good morning, and Scott Congratulations and good luck just to come back to your 2021 EBITDA drivers slide you shouldn't 50 to 200 million opportunity for exercising leadership positions.
How do you think about close the soda scenarios in the market roughly something similar to the price level that we see today improvement or potentially further deterioration I know it's.
Do you think of it as a system, but costa 'cause pretty high sensitivity to your numbers.
Yeah, I'll I'll I'll answer your yeah. Thanks for the question I'll answer your question, specifically, but first I'll sort of say.
I don't know and it doesn't matter almost right I mean, the cost it could end up in a number of places within reason.
Because we're gonna drive on that volatility and with this winning model of exercising our number one positions across our whole portfolio.
That will come out with with a good good outcome I guess to be more specific on your question I mean, if it if it stayed where it was.
Today, I mean, clearly were in great shape right because we just started really implementing this model and practicing.
A little bit and you know in in September there. It was a great months for us and I'm really proud of the team not just the commercial team like I said before but the whole company for really attaching to it so I would say we have.
Miles and miles of runaway to get better at this so I'm just trying to put it in perspective it cost it just stopped where it is today I'd say we're golden.
Hi.
And do we expect a little more decline yeah, there's gotta be some decline here in the near term.
Thank you for that and coming back to chlorine can you give us some sense what percent of your merchant chlorine businesses is tied to the indexes and how long it might take to get away from that are we looking for you know, maybe one year or a couple of years or something home yeah.
Yeah.
Problems will give you an exact number but maybe you can.
Hypothesized what it is from that my my answer is way too much. Okay is tied to the index and as far as.
How long, it's going to take us to work our way out of that I mean, we are working on it hard today and I expect as we go through 20th.
We're gonna chalk Wow, and we will still have part of it tied to an index of 2022.
Thank you okay.
Okay.
Our next question will come from Steve Burns with Bank of America. Please go ahead.
Hi, Good morning, Matt D O on for Steve.
So.
Operating reached in the U S R.
Actually tight for much of these products I mean, PVC, maybe aside so you you know bust up the contracts and you're no longer an index and you start moving price where you can.
You know how do you expect competition to respond to this I would imagine they're not gonna sit back idly and kind of let you get away on the margin and in a minute I realize a lot of course can be a local market.
And so there's a lot of the commentary relating to just the merchant opportunity and and turning leverage where you can where you don't have much competition because given so much of it.
Kind of pipeline in a very competitive golf.
Gulf Coast.
Would think there'd be kind of natural buffers with competition.
Yeah Yeah.
Yeah, I mean, thanks for the question right.
I will comment on what competition my might do I would just sort of put up a few a few points here number one is.
The leader in Corrine and derivatives and were critical to the world. It doesn't matter what the operating radius were critical to the world. That's the first point outside.
The second point.
I would offer is that effective utilization rates are quite different the name plate utilization rates and.
When you have assets.
Many others others face the same right that.
Haven't necessarily.
Did fully invested in our certainly adult meet reinvestment.
Omics that that effective utilization rate really becomes but named play operate right. So I would just contain the little bit that you know you see you operating rates are a bit tighter than than you My bank and again.
Demand is okay. There you know an inorganic sorry to think of titanium dioxide and bromine. It's all okay.
Polyurethane and epoxy says as well so that's kind of how it responds.
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 a potsy being one or I'm, sorry at the being being one but perhaps other things that we're not thinking about.
As it related to kind of what can be kickers on EBITDA over the next two years.
Well you know in the in the next two years right. It's all about growth.
C U contribution profits right I mean.
We have some opportunities for volume growth, but it's not about volume growth right. We'd leave at volume, we can get volume any day, but we want to get it right, but it's all about growth and unit profitability because that's the number one thing we.
Need to be the value player at the the values.
Right. So some of those things that are certainly.
Solid growth in volume is a policy and Pat spoke to that earlier and you look at some of the applications, we sell into right like.
Perfect and play slight blades of the power generation windmills right, we were probably the epoxy and one of every three.
That's in the World and that's definitely a growing segment for us as as an example, I would say some of our coordinated organics that go into next generation refresh. The Reds are a good source of growth for us and perhaps the number one source.
Of growth for us as in small caliber ammunition as.
There is great positive fundamentals bear on both the military side and the consumer side is as well as participation is way up and just as an example of that you know more people are now do.
Shooting sports and target shooting then there fishing then they're camping then there 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 Bahar.
Alright, I'll leave it there thank you.
Sure.
Our next question will come from a few boyer.
Pick wrinkles Scott.
Hey, Good morning, Scott I I had a question on the new model here it definitely sounds a lot more nimble I tend to make a good case that there's more upside down the road, but it also seems like theirs pencil for just a lot more volatility in your bottom line resolved is that fair or would you agree with that and.
And if so is that something that you're comfortable living with or do you expect it takes it took actions to you know keep things pretty stable.
Yeah, Yeah. Thanks, I mean, that's that's a good question right and I think you heard me say before that you know I actually think volatility up or down in the driver's for US now is a good thing cause we get the opportunity to chart turn a number of knobs, but you're right I mean in the in the near term there could be.
Some some volatility because until the model is fully functioning.
And we have our optimal configuration in place right, we may choose to hold value up.
Right on the E C U and to do that you know, we we move a lot less volume through one particular quarter right, but if we do that you know I would rest assured that it'll be a purposeful activity and as soon as we come out of that activity applause volume back to it.
We'd be in pretty good shape.
Sounds good and then my follow up is on Easter you cough in the fourth quarter here. So you can kind of see natural gas prices moving up it looks like at the same time. The electricity prices are coming down does that present any sort of an opportunity for for Ohland and Mister would you be able to capitalize on that.
Yeah, maybe maybe others of water comment on on this right I mean, we have a mix of electricity. Some is self produced.
Some is purchased right I'm I'm not seeing big swings and are purchased.
Electricity, we commented a little earlier on potential for gas to move up which is really more.
European driver for us right now than than anything, but yeah, you're right. I mean, we've got to go out and capture any movements and this this is the one thing that.
Maybe is less pass through.
In some of our other other raw materials some of the other hydrocarbons that we buy we have a lot of pass through activity on those go.
Go ahead of time.
Matthew.
You too, though we hedge gas in about 70% of our power comes from gas.
So any increases you'll see or decreases you'll see through our system overtime. So realistically, it's not that big of a near term headwind into the fourth quarter for us.
The other thing the.
The other big area for power is hydropower show, you won't necessarily see swings and cost.
That you are talking about associated with that.
Got it thank you.
Our next question will come from Travis Edwards Goldman Sachs. Please go ahead.
Thanks for the time and thanks for the detailed this morning, we breathed since we're getting to the end of the call, but just one on capital allocation and the last few quarters two.
Two teams gotten questions just on the Ah you find that in some kind of keeps your priorities I think you know it's an extension of that question. It feels like that sent to me this sort of shifted from four refi obviously of the hydroplane dead two more paying down with incremental casual generation. Just curious are you thinking about sort of kate into debt pay down as well as.
The priorities across.
High School and had to select outstanding versus no more near term maturities six.
Travis This is Todd.
Obviously with the action that we did in the middle of October by taking 100 $100 million.
Cash and reducing the nine 7% acquisition bonds. That's the model you should continue to we expect from Olin, obviously as we generate free cash flow.
You'll see us.
Fund, the dividends and pay down debt.
As opposed to a radar of of trash you are we.
We would expect to delever the balance sheet with excess cash flow of we have as you saw all one.
The slides in the back.
Minimal cash requirements over the next three years.
For a debt repayment.
Biggest one would be $200 million and 2022, so that gives us a lot of opportunity to use our excess cash flow.
Take out high cost debt.
Got it and then can you just remind us what I guess, you would consider access to cash flow or excess cash.
Oh, Yeah I.
I mean I was just something I mean for next year, it's just two to $3 a share right. So that's lever free cash flow. So it's after interest after all captain all fixed capital all working capital that two to $3 a share is available to do exactly what.
Todd said of course, we're gonna pay the rock solid dividend and then we're gonna use the rest pay down some high cost debt.
P shoot the time and not congrats a new.
Scott Thanks. Thanks.
[noise] next question will come from our on this one with our B C capital markets. Please.
Alright, Thanks for taking my question good morning, and congrats on the mural and success over there Scott.
I guess my question that first off I'd start by on the on the leadership strategy. It sounds like there's you know maybe maybe two things in this strategy, which is detaching from the contracts and then I'm only selling and higher value parts of the pain. It does a little bit remind me of you know celanese is options can.
Move into van them, So I guess [noise] in other parts. You know is that somewhat of a fair characterization and then maybe you can just offer your thoughts on you know what change within the company for you to affect this strategy I'm just curious because historically you know these.
Opportunities that had been there maybe over the last couple of years, but is it just the tying to the contracts that you wanted to move away from is it the opportunities that you can sell more of the the chlorine you have more and more outlets for the pouring a combination of all of that.
Yeah. Thanks, I mean, the way I would characterize this Friday, it's really Owen unique Bryan It's R O winning model, it's a much more sophisticated model bed you might've seen in other places in the in the industry because if you think about it we have.
Many multiple sets of supply demand characteristics that are all somewhat tied together right. So the smartest player is going to win and that is a player that to connect everybody in the company to that model because it really is like a three D game.
A chess that's what you have to envision with this this model it's doing many many things right at some of those sites.
Named earlier, and it's doing them all at the same time, putting those activations or activities and place all at the same time that we draw and a war room sort of every day and play out every week. Okay. So I just wanted.
Saying that it's quite an Owen unique situation right as far as why why are we doing this now I mean.
I mean, the team has been incredibly occupied right with trying to build to the point that we could do this this was always the next step in the evolution and we're just here right I mean, I arrived and everybody's carrying me on their back for what they they intended to do and like.
I said I'm, just glad to lock arms and be able to do that so that's it.
Okay I appreciate that and then just the last question is just on the on the portfolio itself. You know given what you just said are there any areas in the portfolio that you feel like you need to potentially exit you know I have they consistently been low valued contributors yeah. That's that's it.
Yeah sure I would say everything's kind of contributed a lot higher value and of course will always do what delivers the best return to shareholders, but knowing our future outlook you know no no one's gonna pay the multiple than they're worth right now.
Thanks.
Okay.
This will conclude our question and answer session.
I'd like to turn the conference back over just got something for closing comments.
Alright, Thanks, a lot I mean, so with that I would just say.
You know that Owen will meet the expectation that has been set for us we're gonna leave we're going to be productive.
It would be very engaged and we're going to win our way back to a much higher equity value. So I would just say thanks to everybody for joining us today.
Thank you for attending today's presentation you may now disconnect.
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