Q1 2021 Olin Corp Earnings Call
Good morning, and welcome to Olin Corporation's first quarter 2021 earnings conference call.
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I would now like to turn the conference over to Steve Keenan Olin's Director of Investor Relations. Please go ahead Steve.
Thank you Sir.
Morning, everyone and thank you for joining us today before we begin and let me remind you that this discussion along with the associated slides and a question and answer session that follows well on.
Include statements regarding estimates or expectations on future performance.
Please note that these are forward looking statements and that actual results could differ materially from those projected.
Some of the factors that could cause actual results to differ from our projections are described without limitations and the risk factors section of our most recent form 10-K, and and yesterday's first quarter earnings press release.
A copy of today's transcript and slides will be available on our website and the investor section under past events.
Our earnings press release, and other financial data and information are available under press releases.
With me. This morning are Scott Sutton, and all and CEO, Pat Dawson, President, a pharmacy and international Tommy.
Tommy and Gopal President Chlor alkali products and vinyls.
I'm Berlocq Olin C O O and Todd Slater Olin's CFO.
And I will begin with some brief remarks and thereafter, we will be happy to take your questions.
I'll now turn the call over to Scott.
Yeah, Thanks, Steve and Hello to everyone.
Super proud of the Olin team for their passion results and further optimism for our future.
Because of their optimism and <unk>.
I have the opportunity to pull forward on a value creation and Formula story.
First of all Olin is on track and to deliver more than one 8 billion a adjusted EBITDA This year.
One proof point to that track.
The second quarter adjusted EBITDA is expected to exceed first quarter adjusted EBITDA, excluding Yuri onetime impact, even though we have significant turnarounds and the second quarter. The third quarter adjusted EBITDA should also exceed the second quarter.
So it is time to start projecting toward a higher adjusted EBITDA up $2 5 billion and above in future years, the emphasis really be and on the above.
For clarity 2020 two is expected to be a positive stepping stone toward that direction.
Some key activities to bridge that gap to $2 5 billion are shown on slide number four.
But maybe slide number five tells a more comprehensive story to that $2 5 billion and above.
Oh and is quickly moving through four phases of evolution.
We have already discussed the first two with you on prior earnings calls and we are currently in phase two the leading phase as we enhance our unique model of optimizing value first a across the whole E. C U E.
They've got a leading as solving the eastern you co production and non drove by studying our participation to the weak side of the EC you anticipating potential value inflection points and then activating to achieve a desired response.
Shortly we'll be looking to take our innovative model and apply it across multiple millions of tons of similar molecules and parlay the model into a much larger business all kinds of commercial strategies will be employed in this phase three a parlaying, including bartering.
Sophisticated trading a differentiated alliances to better serve customers.
Simultaneously Olin will be preparing for phase four structuring as.
And we look to take proceeds from our cash flow machine and invest and been a smart way to expand our beneficial footprint. Please don't Miss our internal equity price target and a lower corner of that slot.
Okay, Let me, let me pull back towards a day a bit and fill.
Still in some key activities and results slide.
Slide number six shows that in the first quarter, we matched our market participation to the weak side of Easter a year.
In other words, we sold less caustic, which not only allowed us to hold a caustic value relative to the fourth quarter, but more importantly allowed us to significantly expand value throughout our coring and chlorine derivatives chain.
I think the lift and the EC you PCI shown on slide number seven clearly shows a positive result.
And that value impact was also a significantly expanded by the innovative actions taken by our apostrophe team as shown on slide number eight.
And just the world's leader and a policy and our wins continue to stack a as we place our offering with key customers and into key applications.
I would also like to highlight the updates made to our over and ESG scorecard in the appendix slides, we are generally and delivering to many of the commitments made in our sustainability report that we still have a lot of work to get fully on track here.
And again this demonstrates the team's comprehensive passion for OLED broader contribution.
So before opening this call up to Q&A, let me wrap it all up and to a contemporary value on slide number nine our teams share success, and leading and running toward parlaying is forecasted to generate roughly $1 $1 billion, a levered free cash flow.
And this year, which is a current stock price represents a yield of roughly 16%.
Really attractive considered and we're just in the early stages of our push for shareholder value delivery.
Okay.
That concludes my opening comments and operator, we're now ready to take questions.
Thank you we will now.
Ill begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone zone.
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To withdraw your question. Please press Star then two and a.
At this time on a little pause momentarily to assemble a roster.
And.
Our first question comes from.
Hassan Ahmed with.
Olympic Global Please go ahead.
And Scott.
You know great numbers that'd be good guidance, but particularly you know I am.
Right.
The a sort of et cetera, he did a debt paydown and side of things no you know as a sort of you guys mentioned that a.
You should be sort of a protein less than two times, a net debt to adjusted EBITDA by a year.
And and you also sort of called out the phase for a side of the evolution at all and just wanted to sort of a dig a bit deeper into what exactly stays for a may look like a.
You know in terms of deployment of capital you know how should we be thinking about M&A would it be upstream or downstream and how should we be thinking about share buybacks.
Yeah. Thanks, a lot I mean, yeah, you're right I mean towards the end of this year, we ended up somewhere at a.
Debt to EBITDA ratio between one and wanted to actually and that's why we're introducing this phase for a publicly now.
Hello, and those activities forward and I do think M&A can be a part of that on the other hand, there are some investments that we can make and this phase III a parlay into as we get into a differentiated alliances and actually invest and things like working capital to be.
Be able to expand the presence of our model. So you know we have all those things we are absolutely focused right now on right sizing our balance sheet and really right conditioning, our balance sheet and Hassan and there'll be a lot more to come on on phase four.
Just had a fully introduced it yet and that will be the subject us on future calls understood understood and as a follow up you know again one of the things that you talked about was and didn't the cycle back and as you guys called it and.
So you know we understand what you were doing and obviously, you know going out setting into a stronger market sort of avoiding certain weekend markets and day like I just wanted to get a sense of what you're seeing on.
On the competitive side of things you know I understand it's an oligopoly, but you know is the market continuing to be disciplined you know how should we be thinking about that because obviously one of the risks like a rises is that you guys may be doing everything right, but you know there could be some market share gains there could be some price.
King games, I mean could you just give us a better sense of beyond oil and what you guys are seeing in terms of the landscape.
Yeah, I was sort of a.
Of course, it would be.
You know a hard for me to call.
And on competitors and so forth, it's easy for me to comment on why and Olin is doing and as we've really worked ourselves through solving this acu conundrum, where our market participation is really set on a week side and and.
And so and doing that we just felt cross downward inflection points, we only crossed upward inflection points on our R. R value curve and.
And so what takes you to a song about it and I know, there's lots of applications out there and you see the clothes that somehow on our capacity utilization is around 80%, but when youre talking about haven't a run a co production scenario basically.
And we're being two or more different needs with one production rate that 80% has the effect of a 90% and in fact in fact, you're not going to see us be able to run about 5%. Because these are a challenged assets to run as well. So I'll just submit that are a.
Actions are leading 80% b be closer to a 100% so maybe not a direct answer to your to your question, but I will say.
Discussions have a ball more toward value with customers and anything else very helpful. Scott. Thanks, So much.
Yeah.
Our next question comes from Alex Yao from a.
With Keybanc. Please go ahead.
Thank you and a good morning, everyone a Scott.
And you were talking about epoxy margins moving towards 30% and the.
The medium to long term.
Margins are this high I assume part of this equation is the price how do you think from batteries and industry in general would respond to this what level of free investment economics are we in and this position and you're going to see more capacity and ours.
Yeah, Hi, Alex and thanks for the question and I'll turn it over to Pat here and just a moment and we probably won't go into the competitor action there, but I would just start pat's comments for us a and then we actually have a long way to go to get to that 30%.
Adjusted EBITDA, but it's totally within our scope and range. So.
Yeah, you know, Alex and I would say why.
Why not 30% because I think if you look at the performance properties of policy and the fact that Theres really not a any clear substitutes for a party in terms of its performance and the value that it brings to customers.
Yeah, It should be able to command and these kind of returns I think also you look at a leadership position and the space that we occupy.
And these are the competitors that more of a upstream midstream space and a way we can monetize our our epichlorohydrin in a form of liquid epoxy resin and make those leadership positions are a very strong.
Also we have a number of opportunities to parlay that you see on slide eight a M.
And that upstream positions.
And the opportunities there and quite frankly are already in motion, whether whether we have the option to hold produced the on.
Option to make versus buy a.
The option to produce more a if we can get the value for that and I think we have a lot of optionality. There. So that's that's the way we look at it and we're really work and give salary.
Parlaying activities as we moved early into the game here towards that 30%.
Thank you Pat and a just as a follow up Scott you mentioned that you expect third quarter EBITDA to continue improving sequentially.
We had a lot of disruptions and the Gulf Coast as you well know.
And how do you expect P C I E.
You see a dci to behave in the back half do you think it will start.
Coming down and at some point and a third and fourth quarter and.
Q2 level.
Well I mean, I would say our improved EBITDA performance.
Performance is going to be a reflection of and improved E. C. U P Ci as well, but what I would say you know there are gonna be points and are in our future that perhaps we exist through a quarter, where we have to make some adjustments in and how we're set up.
Up as we're running our model and that can lead to potential declines and that you see you PCI, but theyre going to be short lived because what they do is positioned.
For the next phase of growth that we have and that <unk> and in our EBITDA.
Thank you.
Our next question comes from Mike Sison with Wells.
Please go ahead.
Hey, guys.
You know a really nice start to the year I guess, you know Scot when when you think about 2020, two and the sustainability of the earnings that you're seeing here in 'twenty one.
And and I know, it's a little bit early to give specific guidance, but but but it does sound like there is potential that 'twenty two EBITDA could continue to go up from 'twenty. One can you maybe walk through some of the things that you will do and under your control to do that and and and what needs to happen.
On that progress.
Yeah, Yeah, Hi, Mike Thanks, Science, and so you know we have given a fairly fairly narrow guidance for 2020, one and considering where we sit right now and you know that.
That one eight to $2 1 billion and what Ive said was look 2022 is going to be a positive stepping stone going above that so we haven't given given specifics on that but some of the items that will help US right. We've listed out on that slide.
And for but I would add to that Mike and I would just say that when you think about you know a supply demand fundamentals looking out a year from now, especially around the EC U K.
The only improve and its a same time, we continue to improve and enhance our unique model and I think when you put those two things together they underpin all of those activities that we listed out on slide number.
Of course.
Understood and then just a quick follow up I think you mentioned that the U P C I.
Get to about 200, and QQ and <unk>.
Is there any way to help us understand how much of the improvement from whatever let's say the hundred and the third and fourth quarter.
And just kind of your new business model and and how much was that.
And the tightness and enormous and and supply and demand.
Yeah, Yeah, sure and just just for clarification might be because that index really represents you know.
The variable margin.
75% of our company right movement, and that Acu, and PCI and make a very big difference and our profitability and so what we've said is we've got a move that index up close to 200 jet and the range up to $5 billion will be a bit so.
Well I wish it would happen and the second quarter and it is not.
And then a get a.
And get to that bat level.
So that's that's part of a winter wear that item says.
Great. Thank you and I'm.
Sure.
Our next question comes from Kevin Mccarthy with vertical Research partners. Please go ahead.
Yes, good morning.
You know, Scott and say listen to the commentary and and having read the slides.
It seems to me that when we hear about alliances tolling agreements bartering et cetera.
And that you're going to be looking for what I would call a capital light solutions to growth as opposed to building, let's say, new greenfield or brownfield capacity.
Is that correct or am I over reading a into the signals here.
Oh, yeah, Thanks, a lot Kevin and I mean, no I mean that that's that's correct. I mean, we do have a next path to growth that is capital light and in fact, we are already engaging and those activities fried you heard when Pat and <unk>.
And earlier and earlier question that we're doing things wide totaling some of our scarce upstream materials into liquid epoxy resin. For example, so that we can service our customer base and Theres, just a lot of opportunities to do that across our.
Complete portfolio. So those are the things that we can pull forward the fastest to support growth right. There is other things we can do beyond that I don't really see greenfield expansion as part of our future there could be limited.
Brownfield expansion, depending on the alliance opportunity that we might have but yeah. It's a low capital near term growth strategy that will complement and with that phase for a structure.
Okay. That's very helpful. And then secondly, a I'd be interested to hear your updated thoughts on international trade a normally win when prices rise.
You know and a parabolic fashion.
What would happen is we would see imports to exploit a physical arbitrage opportunity and <unk>.
Today's market, we've got all kinds of chaos and friction and global supply chains.
Are you more insulated from from trade threats today, and and what if so what do you think that means for olin's profitability.
Well I'll I'll start this and then I'll ask dommy and sort of add.
And a little bit to it but you know our our our winning model is a very active model and so we participate and global trade at the right moment and with the right with a rise products on we're an active participant and that instead of just being.
Subject to you know reactions that I and developed from that and what Tommy and can probably do a better job with that but I did a Kevin good morning, just a dovetail on the problem and I would tell you that the way our model is really set up right now.
Regardless of the stimulus it and put put on us where there is a changes in trade flow.
Demand flow and use flow, we just adjust to it and not have to mitigate from it and so you know as we saw just to give you a brief and some examples what we saw on the.
Globally on the vinyl side a lot of you know.
A strong demand you know a lot of people running.
And for that stronger side, and we're running towards our weakest startup caustic and it didn't mean that we pulled back our participation of toxic, but we look globally.
And where they were a pools on the available material and we have done some things and purchasing products from regions that we and our prior models or a higher paradigms, we haven't done before and so by doing that and we were able to effect the participation strategy on our ease of use that we wanted to.
Do we still net some desired steel customer growth and reactions to be able to serve them and their demand has ramped up and we did that and a very fluid and efficient way. So that's just one brief example of out of the way, we adjust to a really any curve ball or basketball and <unk>.
On our way.
Okay. Thanks, so much.
Our next question comes from Frank Mitsch Fermium.
Birmingham Research. Please go ahead.
Thanks, so much and a nice result, and.
Just wanted to drill down a little bit more on to the Chlor alkali side of things on slide five you mentioned that the model fits across millions of additional pounds and yet you took the decision to shutter a 50 per cent of the Macintosh diaphragm.
So can you talk through the decision behind behind doing that.
Yeah, Yeah sure I mean, just a says this is Scott I'll start I mean, hi, Hi, Brian.
Yeah, a bottom line.
Just for clarification, our model fits across millions of additional tons of material margin millions of additional power.
On the material.
And just.
And just for everybody.
We were selling roughly 14 million times a year. So it's you know maybe not that far fetched a st.
We can grow it and that kind of.
Travel and.
Yeah, I mean look.
When you think about the capacity announcements that we've had in terms of shutting down they were underutilized assets right and the reason that they've been underutilized assets has been because of a way we run our model right and we said, we're not going to participate.
And poor quality market and so therefore as one example, not participating in a poor quality caustic market means we don't have need for that asset anymore. So we're going to rightsize, our balance sheet to be much more nimble and the future and.
That's what that's what it's about it's not an indicator that demand is weak or weakening and in fact, it's just the opposite.
Yeah.
Understood and and listen I mean, obviously, the Winchester EBITDA really jumped off the page and and a much of that is you know Lake city is a.
And is humming along I mean, when you originally bought that the a the indication was that that should add about 50 million of EBITDA per year, but it looks like it's heading that per quarter can you talk through a.
What youre seeing with your Lake City business and have we repealed seasonality and a.
A.
And and ammunition, because you know, obviously and it and incredibly strong <unk> result.
Yeah, Yeah. Thanks, I mean, I would say actually you know late Lake City is doing as we intended and as we said maybe just a little bit more and you got to remember that we integrated it very fast right and not only has it become part of our.
Military business, but also part of our commercial business. So the performance improvement that youre seeing is across the whole business. Okay. After we made the acquisition and a team did a fantastic work to really go out and optimize our whole.
And supply chain and our whole approach to the market there and the.
I mean demands stays stays strong and it's a really a result of the fact that the sport on.
Target shooting is growing quite a lot and it continues to do that and you see a pause or you will see a start to use the Winchester brand to grow that's for a target shooting and we're doing things like we just had had had supported that.
Winchester Sporting clays, ladies comp.
Ladies participation and target shooting is one of the fastest growing areas and we're gonna be a big player and Manhattan.
Got you. Thanks, Thanks, so much.
Sure.
Yeah.
Our next question comes from Scott.
Yes, that's a J P. Morgan. Please go ahead.
Thanks very much on.
In the light of your EBITDA ambition.
As a pet.
Pattern of your capital expenditures over the next several years is different that is it.
And higher than $200 million a year and.
And you spoke of buying various assets to fill and.
And no tactical or strategic gaps.
How much might that cost roughly.
Well, Yeah, Hi, Jeff I mean, I would say and <unk>.
General and for the next few years, where and that $200 million a year range for capital, but what I would also complement that statement with is the fact that you know some good opportunities are going to come out of our activities as we.
We move into phase three a par lane and potentially phase for a structure I know you get a phase four and structuring and piece of it if we did do some targeted M&A, but even in a phase three.
They have the opportunity to invest in a and a different way and therefore, we might use some of our you know levered free cash flow to do some of that but in general it's going to be $200 million a year at that level for the for the next next few years maybe Jim.
And is next to me and wants to comment on why we can stay at that kind of level and the base business.
Yes.
And very hard at our RF and based on a continual basis a lot of it is about productivity and what we need to run and what we don't need to run and and you've seen you've seen the progress that we've made on productivity some of the asset closures and so forth that and actually reduces the amount of capital that we have to spend maintenance dollars fixed costs and so forth.
And also the fact that we.
And we're now running to the weak side of the Ecu's, a we look at things a little bit differently and.
And then we used to in the past, so and $200 million, we feel like we've made heavy investments and the early part of the building phase and now we're reaping the benefits of those investments and so our capital requirements are going to be and that 200 million dollar range for the next few years.
Okay, and then from my follow up.
How much where you're a caustic soda volume.
Up or down sequentially and year over year and the quarter.
Well I'll pass this to Saddam Yeah, and you know again I'll just preface it a little bit with you know.
And it's a movement of a volumes you know relative to a prior time period and want a product or almost inconsequential to our results right. It's how we use all of those activations to deliver the best value across a whole.
See you and all of our derivatives that utilized partially you see you Tommy and can give you something that's probably a little more specifics.
I'll tell you end up saying defending and just another layer to the unions are there Scott just field and that.
It really doesn't matter you know what the answer is there a lower.
And they were.
So any relevant period, but that is a result of our model right how much lower.
Okay.
Laura.
We work on a specified.
They were purposely.
As a purposely lower.
We pulled out of a.
A low you know.
And you won't pools, a low value liquidity and wherever they are and the world.
So we pull out of and the past. We've said we were a certain parts a level of participation on the export markets and if the export markets are weaker and you see where the pricing has been in the a globally traded market.
And that's clearly a good area that one with good pull back from and there were others as well so a lower lower by a decision lower purposely a.
And it's an area that we still look at managing we're going to always take a fresh look at what is the relative strength, a one side of the acu towards the other.
And you know the easy you as a it's not a zero sum teeter totter, we completely break away from that paradigm.
And we just played and you know, we'll just going to keep playing to the lower side and a lower side is still caustic soda a relative to everything else on the chlorine side.
Lower by 10 per cent is it as much as that.
Hey, Jeff I mean, what what I would tell you is that it actually takes you know a lot less volume movement.
And you might be anticipating to keep from moving across a pricing inflection point and I'll just sort of refer you back a slot and sponsor.
Yep, Okay. Thank you.
Yes.
Our next question comes from a run with this one a thin with RBC capital markets. Please go ahead.
Great. Thanks for taking my question and congratulations on the great results here.
So first off I guess I, just wanted to understand what you're seeing and the market right now it looks like.
You are seeing some excuse me, some uplift and caustic soda pricing as well.
What do you expect for caustic soda pricing over the next a say two quarters or or or a through the rest of this year.
And if you want a grab that one sure. So I mean, the short answer right now as well if you look it at a high level.
And just a historical trends and association is that.
A big trend, where the economy economies are opening up and so forth, but again to us. It's a simple equation and it goes right back to you and a coffee still remains the weaker side of the U regardless of any upward trend there can be seen with the aforementioned economic recovery.
And we still look to manage a participation based on which side is relatively weaker than the other.
Okay, great. Thanks, and then.
Could you also elaborate on some of your plans moving forward would you potentially consider.
Opportunities to move more downstream and to say PVC or a could you also comment on a your participation and E D C.
Yeah sure.
Scott I mean, when and where we're not we're certainly not looking to move downstream, there's so much opportunity and where we participate today and you're likely to see us do things and.
Complementing our existing business, yeah, yes, we already and go into a D C and actually are the world's largest merchant marketer of EDC has as well.
And then if I could just ask you to comment on them.
Overall supply and demand trends and do you think demand is strong.
And this market or and do you feel a bit more optimistic about the next several years on a on demand or is it a still relatively I'm going to follow a industrial production growth for you to you. Thanks.
And I would just say, it's starting to get better right. It's not it's not super great. A day, but you know every month every corner same store and generally get a little bit better and that's been our outlook anyway is that demand continues to improve and <unk>.
<unk> weighs relative to supply and gap continues to widen.
Thanks.
Yeah.
Our next question comes from Matthew Blair with T. P. H. Please go ahead.
Hey, good morning, Congrats on a on the great results.
So it's been reported that one of your competitors will be restarting some core alkali capacity after after a shuttering it for about a year and obviously a different approach than what you've been taking but Scott I was hoping that you could just kind of you know.
The address that and and and how do you think about this as a potential risk to the industry that the capacity growth might be a little bit more than expected.
Oh, Hi, Matthew and thanks, Yeah, I mean.
Of course, I won't comment on specific competitors and and their actions, but what I would say is that factored into our plans right is a view that yes, there will be some supply at it over and over time.
And it's just that all of that announced supply is likely to be a lot smaller than a growth and demand and when you marry that up with a the fact that there's still a lot of core quality markets out there and certainly you know there is a lot of Val.
All you left to lift and the easy you, which informs a is about how we're going to run Olin and what assets. We're gonna have and our you know a future portfolio. Then you know I only see you know the overall outlook.
As a positive so the simple answer is look we certainly expect there to be some some supply expansion is out there.
Sounds good and then and I was hoping you could share any more details on just other chlorine derivatives that were especially strong in a quarter you know a other than D C, which has some pretty pretty transparent pricing.
And on on our a first as it looks like Hcl pricing was up more than a 100% quarter per quarter. So could you just offer any more commentary on on what youre seeing on that that chlorine envelope.
Yeah, well, that's a I mean, not calling a envelope as you know most of our company. So I'm I'm going to let you know a domino's hi, Mike.
A comment or two on something and then you know Pat who might want to add onto as a part b comments, B and a key Korean driven and for us.
Yeah, I'll refer you to a couple of slides I'll refer you to slide 17, you know a.
The appendix showing on a heat map.
And then refer you to.
A slide also at the back slide 21, and both of those when you put those together and you see you know pretty widespread.
In Olin chlorine and chlorine derivative for a for a very broad spectrum of and uses you see a continued momentum.
And you know of and.
And and.
A question on customers for OLED as a whole is ability to supply.
I'll go back to this on his comments or questions at the beginning yes.
Oh, well, we see it and things of a question around maybe market share I will just tell you that our customer forecasts are still for volume throughout the rest of the year that are higher than our <unk>.
Forecasted a ability to supply them. So that should give you an indication as to the robustness of the flooring side, which of course and it's going to my earlier comments, there's still a relatively stronger than the other.
It's a classic sites and we'll continue to manage each of you around that.
But a part a GTO ACL bleach merchant chlorine go all of a it's a it's all of those green lights, and a heat map and I'll pass it over here and a path yeah. John I mean, you know bad guys said from a a party.
Hockey standpoint.
We do sell some of our upstream.
Products into wastewater treatment and a.
Municipalities for water treatment and we've seen that really a continue to improve on demand.
And having a part C and a RASM standpoint, and you look at simple engineering construction and.
You know automotive, even though theres been a semi chip shortage, a we've seen improvement coming back there and apply.
<unk> electronics yeah.
Trying to see and maybe a little bit a life again and oil and gas Lynch uses fusion bonded epoxy for pipelines and death.
And it's like that and machinery on machinery and colleagues with a Pops day. So I think it's back to what Scott said and you know we've.
And we've seen a.
Good you know month over month improvement and we think we're still very much and the early innings of this a demand recovery, we think there's a there's more coming.
Based on some of these end use markets I just mentioned.
Great. Thank you.
Our next question comes from Alex that you anyway from Citi. Please go ahead.
Hi, Good morning, Scott.
Just looking at your Chlor alkali sales.
On a as you buy a region over the last couple of years, it's gone from 65% U S based to a 75% that's part of a strategy due to a higher net backs or how do you see that you know over time going forward.
Well look I mean, where are we.
So theres a lots of opportunities to talk a flexpath Eric Joseph.
And certainly the activities that we've had globally have enhanced our business in North America and look it's a high level statement, but I think and the future you'll see us do more business, even outside of North America, and as we really expand and Paul.
And our model.
Okay and.
And then maybe a question for Pat how much a packs and it goes into a higher value versus the low margin and markets, where do you want a gift that down too and then is there a difference and the profitability between regions currently.
Yeah, I think that you know I think you know if you look on slide eight we talk about where we're increasing our supply and.
And the high high margin performance coatings, I mentioned civil engineering earlier.
Formulated type systems and certainly that.
And the value over volume.
Orientation that we have is putting more into those types of that book areas and applications.
And Yeah, Theres places, where you have low margins and industrial coatings when energy.
And in an area that's been growing but you know we've pulled back from some of the low end of that business.
And and then some of our upstream feedstocks were definitely doing less business there because the value is not there I think geographically speaking one of our leadership advantages that we have is we have a lot of flexibility as to how we flex product between the regions and a that's a pretty dynamic.
Dynamic process and we use all the time around or activation and so I wouldn't say anyway and geographies.
And I I don't pay attention to that you know so much strategically as I do and where the opportunities come up to create more value and to juice up or a return to the CEO.
Okay, and then lastly, Scott maybe to help US track the progress and the value first equation and and moving away from a mixes and higher activation and how much of your 14 million tons that you sell.
Have undergone this change a strategic change.
Well I would just say if you think about that sort of roughly 14 million tons, I mean, where we're left with a very minority part that is still a attached to find a index directly.
And you know we.
<unk> got some hurdles to get on.
And all indexes or at least some of the indexes and five a year and and we will still have some that'll continue into next year, particularly in some areas like you know Mark merchant chlorine, where it's you know really completely non non functional but after that.
A completely completely away from many of the indexes.
Thank you.
Your next question comes from Mike Lee.
Barclays. Please go ahead.
Great. Thanks, and good morning, guys.
And you got a question on a long term EBITDA outlook I think last quarter on the call you talked about $1 5 billion being a target level and maybe two years out or so and obviously the hurricane and market tightness is helping you get there this year, but it seemed like 1.5 was roughly where you thought the earnings power of this business could get to over.
Time, and now three months later, you're telling us that it's maybe a $1 billion hires on that so I'm just trying to better understand maybe what's changed over that time, whether it's been our confidence and the pricing power of the commercial success, you're having just why has the long term earnings power of the business moved so much higher over the past three months.
Yeah, Hi, and thanks, Yeah, I would just say looked a fundamental factor a good early performance is that a whole company as a whole team is b a.
A really successful at running our model and Theres lots of momentum there and Theres lots of runway left there fundamentally that's what's going on I would say that look we've talked about other numbers of course, one five to 2.5.
And I mean these are all you know just points along and upward curve. There's no cap on this business right on sort of unwilling to say that if we get to a cap or we see any kind of near term live limitation and.
So you know there's just a long run way here one day, we'll be talking about different numbers as well, but I thought it would be sort of too scary to put up three two guy.
And I didn't know if that makes sense and then maybe just a.
A follow up question on capital spend and spending tangential to Jeff's earlier question, but I think you're guiding capex and the next few years to $200 million and your DNA runs around 600 million, which is a much lower ratio than most companies. So can you just talk about how youre able to sustainably achieve that or would we expect DNA to start to move.
Lower towards that Capex number overtime.
Well I'll tell you what I mean, you know Todd is going to explain why we have such a discrepancy there go ahead.
One thing to remember Mike is a big portion of our depreciation and amortization is amortization and included a net amortization of a cause I've tried ethylene payments for 20 years a cost based ethylene.
Amortization is well over 100, plus a million dollars a year on those agreements and so you know when you look at D. N. A that's part of the difference when you when you make them interest other people is those large ethylene and investments we made all the way back starting in 15.
And were completed in the summer of last year.
Great. Thank you guys.
Yeah.
Our next question comes from John Roberts with UBS. Please go ahead.
Thank you did you sell any electricity or ethylene during the quarter instead of using it internally.
Well, Yeah, Hi, Hi, John.
And we did have a gain right and we called it out as a one time gain and that gain is essentially a associated with the fact that you know we buy energy and advance so and I think you're very aware of our gas hedging program. So during the hurricane because we were ordered to.
Now we had no way to utilize what we had already bought and so we just sold it back.
And so you didnt make electricity that if you just sold a gas back.
That's part of it yeah, we're not itemizing everything that goes into that $99 million gain because theres a lot of puts and takes there, but yes that is part of it.
Okay and then.
The pricing dynamics and the ammo industry changed since we now have a duopoly after the breakup of Remington.
Well look I mean, the Remington event happened some time ago, there's quite a lot of producers a of ammunition out. There you know we happened to be the largest and demand continues to grow and that has been a fundamental.
Change and the pricing dynamic is that this is just become such a large wholesome family sport or a 55 million of US are out there you know doing sport target shooting and that's the biggest change.
How much was price up year over year and.
On Winchester and Yeah, we didn't we didn't give a per set on that but you know volume has a lot to do with our growth year over a year, primarily because of Lake City and then pricing is at least as much as that volume growth.
Thank you.
Sure.
Yeah.
Our next question comes from Steve Byrne with Bank of America. Please go ahead.
Yes. Thank you.
We expect a this 30% EBITDA target and the pox C and a shift more downstream and and less of the upstream commodity sales.
Do you have as a commercial relationships and those downstream resins.
And on the production capacity to move more of the feedstock material into those downstream products or will this require some acquisitions.
Yeah. Steve This is Pat first of all let me let me just a course correct you hear a little bit a really on our sweet spot is and is in the up and the midstream part of the epoxy value chain.
We don't go nearly as far down in that chain is to say the questions that you were asking we certainly have all the right channels to market and place today, and monetize and two really exert our leadership and in up and midstream.
So.
I would just say just a little correction and and you know, how we view that value chain and where our strengths are.
So you can get to 30% EBITDA margins by selling a P and.
Cumin, and BPA, and so forth and not move downstream.
And no stated that that's a again and part of the equation is a strength and he is upstream but that midstream we have many channels and stuff.
How we monetize.
The epichlorohydrin and and the bisphenol a so that's where we have a lot of channels a lot of optionality a lot of that Optionality and parlay.
So that's a pretty broad, reaching and as you move down and that midstream.
And then just curious about the <unk>.
The margin on at the if you look about your broad platform of <unk>.
Korean containing derivatives, where would you put F D. A in the in a ranking of all of those coring containing products I mean, if you look at the.
The margin difference between your two segments a.
And I'm, just curious where that Abbvie would fall in a in a ranking.
Yeah, I don't think we're going to get into the rankings have a ethane versus a.
You know derivatives have a where we put that at D. A.
You know and they make no mistake as a strategic pillar to our upstream and it's a strategic pillar is to Howie.
Parlay.
Down through the midstream and do those various end use markets, where we're prioritizing our value right over volume guidance.
The other thing to keep in mind, Steve as you know when we had our investors presentation back in February of 19.
One of the headlines on my slides read and then you know at P and L a or a supply demand projected to be tight by 2021.
And so we're just entering this phase of what we've been saying for the last two years and what we saw coming and and this you know sweet spot of ours around this up and the midstream and and and Parlaying. These things that we talked about on slide eight. So you know I I think those kind of fundamentals bode well for a.
Our ability to get to this 30%, our EBITDA and epoxy.
And then Scott and just one quick one on your sustainability a slide.
You a kudos to you from putting that you're a scope one and scope two emissions.
We understand you also have a and emissions reduction reduction target for 2030, a just curious as to whether you have a strategy to get that 10% reduction and whether you're already well on your way or do you anticipate some some capex intensive projects to achieve that goal.
Oh, Yeah, Hey, Thanks, a lot for recognized on that and Youre right. I mean, we did have that target by 2030 and you know we're way ahead on that target right. Now in fact that was referenced from a baseline year of 2018, we have already achieved an eight point.
4% reduction and you know their carbon emissions intensity in other words, how much as you know.
Associated with every time that we sell so we're well on our way to exceeding that target.
Okay, Great Hey, operator, why don't we take one more question what about a run out a time.
Thank you. Our next question comes from Angel Castillo with Morgan Stanley. Please go ahead.
Alright, Thanks for taking my question.
So just one last one on price a within the clock liver.
And just thoughts as to how much it and was actually driven by all of the outages that we've seen globally, whether it's within a quantify on their property book.
And since you're your own kind of self help initiatives and pricing initiatives.
And yes, if you just break that down and that'd be helpful.
Yeah, Yeah, I mean, most of it is our self help initiatives and there may have been some acceleration, but this really goes hand in hand, with our actions and our contract strategy dummy and why don't you fill in sure thing and Joe.
I would tell you they don't regardless of the outside market condition and our self help just takes a different form so as we look at a kind of you know.
Going forward with a with bill.
As we continue to deploy this model is going to be less and less dependent on on outside factors. Those just kind of probably a again, how we want and manage our acu participation and play to the weaker side, and then and as we've pivoted and kind of think going forward here on all that just means that that will just want to keep you know as we've talked before and controlling our own destiny.
And that just means more flexibility for us we we may certainly engaged in a in a different approach on contracts with a you know.
More selectivity on the number of contracts, we choose to Andrew we certainly want a partner with winters, but a within that there'll be a lot more selectivity and a and optionality for us in terms of the how.
And how many contracts we enter into their duration their volume definitely more dynamic pricing because that will not play into the next level of sophistication with with this model that we've a we have really good traction on.
That's very helpful. Thank you and then on day Bucks and margins you noted that you expect them to improve sequentially and the second quarter. I was just curious does that contemplate a meaningful pickup and benzene prices and or you know as you think about where raw materials are moving a how should we think about that within your within your.
Got it.
Yeah, and Angeles listen a you know we feel very confident and the fact that we've had good pricing momentum.
Yeah, we've seen that pricing momentum continue here in April.
There's a public P&L increases out there for me at a.
Are also getting good traction so we feel very good about the sequential improvement.
And our margin and a sequential improvement and improve returns D. C E O.
Yeah.
And I was thinking.
This concludes our question and answer session I would like to turn the conference back over to Scott Sutton for any closing.
Yeah. Thanks, a lot I mean, I guess from close and you know I'd just like to repeat what I've said in a fourth quarter earnings call I mean old and it's going to continue to win our way to a different valuation, which means we've got a continue to lift all with Stifel. Hi, So thanks, a lot for joining us today.
And.
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