Q2 2021 Olin Corp Earnings Call
Good morning, and welcome to Olin Corporation's second quarter 2021 earnings Conference call, all participants will be in a listen only mode.
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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 Chad good morning, everyone and thank you for joining us today.
Before we begin let me remind you that this discussion along with the associated the sides in the question and answer session.
It's all of those.
We will include statements regarding estimates or expectations of future performance.
Please note the things 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.
The plane the risk factors section of our most recent form 10-K and in yesterday's second quarter earnings press release.
A copy of today's transcript of slides will be available on our website in the investors 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 Olin CEO Pat.
Pat Dawson President of Oxy.
Dominic <unk> president of Chlor alkali products and vinyl.
Bret lawyer President Winchester.
Jim viral the Olin C O O.
And Todd Slater Olin's.
Oh.
Scott will begin with some brief remarks, after which we will be happy to take your questions.
Now I'll turn the call over to Scott.
Yeah, Thanks, Steve and Hi, everybody.
Look I mean, the the most important data the note a day is that our own employees are accelerating our success. So we're gonna use.
Use this earnings call the forecast just a bit further down the runway as well and keep up with our team's momentum.
It was crazy previously forecast in the second quarter adjusted EBITDA did exceed the first quarter adjusted EBITDA by 100 of $19 million or 20.
27%, excluding the onetime benefit from winter storm Uri in the first quarter.
We also forecast that the third quarter adjusted EBITDA will exceed the second quarter as well and we expect our full year adjusted EBITDA result to be at least $2.1 billion.
Yes.
So opening the opening up with slide number 3 of the presentation 'twenty 'twenty 2 is a positive a stepping stone for Olin principally because we will grow the number of knobs in our hands via expansion of our interlinked matrix of activation nodes.
The various combinations of activations across the interlinked matrix are what lifts olin's value.
Generally the first order effect of a singular activation is unseen however, the second or third order effect from multiple activations is what lifts.
Oh, Oh in Pi.
1 of the mental for that rising value tie our free Lynch pin products elemental coring epichlorohydrin in ammunition primers are pricing in those products is a ratchet our pricing the only turns 1 way.
Wei and does not reverse if necessary, we will sell zero volume into the freely negotiated market to preserve our ratchet principal and the value of our broad downstream change based on those linchpin products.
Across all our businesses suppliers.
The things are closer to empty the in full.
In 2022, we expect demand growth to outpace supply growth.
Continuing to slide number 4 in 2022, we should gain traction and our next phase of parlaying and potentially surface some acquisition opportunities.
<unk> choose to complement our differentiated model and in doing so use the funds from the Olin cash flow machine to deliver more value to our shareholders.
On slide number 5 that parlaying activity of the new in 2021.
But we do have some accomplish.
<unk> met the catch up on and report beginning here in the second quarter of which reached an annual run rate of about 500000 tons of molecules made on somebody else's assets, but now running through our matrix, we will share of tracking mechanism to report on our progress.
<unk> in this important area as we move into 2022 and beyond.
In my opening comments I said, we would forecast just a bit further down the runway. So on slide number 6 we are calling out of few discrete upsides beyond 2022.
I.
I will just note that we have a lot of elemental coring of lynchpin product moving into the titanium dioxide space, we wont be supplying in large parts of that industry in 2023, as we move that corrine volume into higher margin end uses for.
For completely take it out of our system.
In 2024, we expect Winchester's participation in the next generation squad weapon program to become significant and we have breath for your our Winchester President with US today, if you have some questions about that or.
Per our expectations to continue growing the recreational shooting pie as well.
And finally in 2025, the 10 year cost based sales contract term, representing 30% of our E. C use is completed as well and all options.
We're about Creatives for Olin.
Some options substantially reduce our carbon footprint as well as we evolve our ESG scorecard targets.
Pulling back to today a bit please see slide number 7 and number 8 as our mastery of the E C U conundrum.
Our solution continues to improve we matched our market participation for the weaker side of the E. C U caustic.
And pricing on both sides of the E. C. You improve versus the first quarter. The first time that pricing on both sides of the E. C. You moved in the same direction since we of art.
From slated this contrarian model.
Not surprisingly the Olin E C. You profit contribution index lifted again.
Moving to slide number 9 I hope you'd noted the Winchester's second quarter, adjusted EBITDA improved to $115 million so in.
In addition to our future participation in the Army's next generation squad weapon. We are embarking on a plan to range. Some of the 175 million adults and part of the 45 million youths, who don't participate in target shooting today by using the Winchester brand to grow the overall.
Particularly.
So before opening the call up for Q&A.
Let me call out of few key elements at play in the third quarter on slide number 10.
First of all fundamentals are good.
We started off the third quarter with our model positioned to participate less in the week or so.
Side of the E C U caustic.
But as we move through the rest of the third quarter, we will adjust our configuration, depending on which side of the D. C U as weaker relative to the other side, we relish that opportunity to add another proof point to our model and demonstrate that we deserve a higher.
Valuation.
The pox. He continues its upward adjusted EBITDA margin March as it is now at 22% and Winchester improves its value equation, even though we expect commodities cost to be sequentially higher in the third quarter.
That concludes my opening comments and operator, we are now ready to take questions.
Yeah.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.
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Withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
And the first question today will be from Mike Sison with Wells Fargo.
Go ahead.
Hey, good morning nice quarter.
Scott just curious when you think about the E C U PCI improvement in Q2 to 192 versus the $1.47, 6 how much of that do you think was sort of of the strategy.
This is kind of in.
Please pricing just going down.
Well I I I think our strategy is to move Owens pricing.
As we run our model. So I mean, those things are just intimately connected line I mean, we're taking very specific actions.
Industry holds and trying to telegraph those actions in advance of it you know the world understands that this is a purposeful activity.
Got it and then you had mentioned in the opening remarks acquisitions.
In particular, you think would make sense for Olin as you look at.
Those opportunities down the road.
You know Mike I mean, we still have some work to do in this area clearly as we move toward that that phase for our structuring, but you know what I would say about potential acquisitions will be looking for something that essentially adds another line.
My ear or box around our matrix and when we were able to improve the value of that acquisition of significant enough to impact.
Our performance all the way back to the fundamental E. C use so that'll sort of be our main criteria.
To go after acquisitions.
Great. Thank you.
<unk>.
And the next question will come from Hassan Ahmed with Alembic. Please go ahead.
Morning, Scott.
Hi, Hassan Scott question on Chlor alkali products you know.
The sequential sort of the margins over the sequential EBITDA all of the day of Q1 to Q2, I mean, adjusting or scraping away the Yuri sort of favorable impact if I took a look at the margins the margins were relatively flat quarter on quarter.
EBITDA was up call it the around 17 million and this is.
Despite you know you guys, calling out higher each of you contribution of sequentially and you know if I took a look at the slides and heard your comments properly.
You know you talked about sort of lower volumes. So the question really is you know.
Despite these favorable pricing trends.
The margins were relatively flat.
EBITDA was up slightly.
I'm just trying to understand the sort of negative volume impact broadly how much of that was you guys actually sort of taking out volumes from the system versus you know I keep hearing about supply chain disruption impacts logistical.
That sort of issues and the like in the quarter. So if you could just parse those out as they relate to the volumes.
Yeah. Thanks, a lot I mean the.
The way we would answer that question basically is that look we're I mean, we're running our model, which is focused on value over volume. So what you saw.
In the second quarter is of course, our pricing went out of our E. C. PCI improve but the reason that you sort of see the margin issue. There in CATV is we did have some fixed cost issues that won't repeat themselves in the third quarter. So we've addressed.
The bad items absolute profit margins kind of flat understood. The b because of the fixed costs of that doesn't continuous zone.
Understood understood and as a follow up on the raw material side of things.
Obviously, we've seen you know higher natural gas prices.
As it relates to the epoxy segment.
What happened, we've seen sort of a higher benzene and propylene prices. So you know as you.
I have given you guidance for the second half of the year. How are you guys thinking about the sort of raws, how you're managing those sort of higher prices.
And you know as you've given your guidance, if raws do come down could that be.
Months of.
You know of.
A tailwind above and beyond what you guys have guided to.
Yeah, I mean, some of those things you mentioned really impact our proxy segment quite a lot. So I'll ask Pat to answer it.
I think first of all the raw.
Raw material cost of the hydrocarbon costs it really never.
We have a big impact on the epoxy business, we deal with those.
Pretty easily through the through our value chain, so I wouldn't really.
I'm really not concerned about what happens with the hydrocarbons.
Given our ability to pass those costs along in the manage those costs within our system.
And of course, you know we do have options.
To make versus buy and our key raw materials around things like our BPA at all and even epichlorohydrin.
Very helpful. Thanks, guys.
The next question will come.
Jeff Zekauskas with J P. Morgan. Please go ahead.
Thanks very much.
How do you see.
Changes in global.
Fox the supply and demand now that prices have elevated do you think that it will invite new competitors in ore.
From some of your competitors snake extend capacity or do you think you know it well.
Take quite a long time.
Yeah. Thanks, Thanks, Jeff I mean, I'll just start it out in the.
Pat will give a little bit of color on maybe some specific areas of demand, but generally Jeff I mean.
The demand is superb and improving across multiple segments of the pox. He goes and Pat do you want to give a little color yes, yes.
Thank you know if you look at you know some of the major markets. We have a variety of markets that we sell into you know the biggest market as being around industrial and performance.
Thats coatings, but we also you know of electronics is very important to us automotive and of course of between automotive and electronics, they get intertwined with electrical vehicles and a lot more printed circuit boards being put into the electric vehicles and that plays to our strength with what we do in electrical laminates in.
In Asia appliances very strong.
Oil and gas, we're seeing oil and gas you know improving theres more demand coming.
In oil and gas for a fusion bonded epoxy resins, and then I don't know, Jeff if the conscious or not but.
The marine coatings have been very.
Very pretty much pardon the pun debt and the wider for the last I'd say 5 years in shipbuilding container ships or orders for new container ships in the first 5 months of this year were nearly double the orders for all of the post 2019 and 20. So this is demand for our policy.
That is yet to be realized that will come in 2022 and 2023.
Okay.
I guess for my follow up there've been so many out of chose.
In the United States, because of weather and chlorine and caustic.
Which has tightened the supply.
The mass demand balances.
If we don't have you know.
Our interest to come and the industry gets back up the normal rates of production.
Do you think the supply demand balance in chlorine will change from 2022.
I mean, Jeff. This is Scott I mean, you know I just 2.2 points number 1 you know we're running our model and so we control the supply demand characteristics of our business. That's 0.1, but even if you fast forward for 2022.
To E C U demand.
Growth Outstrips E C you supply growth.
Same exact thing hoxie, and epichlorohydrin right demand growth far outstrips supply growth.
And if you take that through our small caliber ammunition business Winchester, you see exactly the same phenomena as well.
Okay. Thanks, so much true.
Uh huh.
And the next question is from John Roberts with UBS.
B S. Please go ahead.
Thank you what's the range of your of chlorine realized prices and is it fair to say the including the T. O 2 of the Dow contract of about half of your volume and chlorine is locked into these lower price contracts.
Yeah, I mean, we we have a yeah. Thanks for the question I'll ask.
And just to comment a little bit of at a high level, we have a really broad range with a lot of opportunity Tommy and you want of gifts for Comcast.
Sure thing John Good morning, Yes, we've talked about in the past debt you know.
Tied from the 30% of easy to use debt or on the long term cost base.
Based arrangement.
The remainder of our merchant chlorine, we've said that we've you know we've moved a significant portion of off of in the indices and puts them you know within our own destiny and we still have of ways to go but you know even within this quarter, we achieved moving another significant chunk.
Of this volume off of the you know rearview mirror arbitrary indices and stepped up the value of that chlorine into you know, it's true reflection of all of its market value in our system. So.
It's the other way to go but the.
The second quarters through everything we've done in running our model.
We've we've achieved yet another you know another milestone step for us on our way to put more of our ease of use back into our own the chart our own destiny with them as we prepare for 2022 and beyond.
Okay, and then I guess I don't understand the primary market that well in the Winchester business.
How big is primers.
The percentage of Winchester of however, you want to characterize it and what what's going on with pricing of primers, because that's something we don't observe in the market.
Go ahead, Brett sure.
Theres really 2 manufacturers of primers in the U S. Right now in Winchester is the largest.
1 of the things that we've taken a strong look at is our past practices and the complicated nature of building primers and the high startup cost of getting into.
You know what I'm of business and we're exploring strategies that will help us.
Get full value out of our primary manufacturing capabilities.
[noise].
The price and the.
The next question will be from Frank Mitsch with Permian. Please go ahead.
Hey, good morning, and congrats.
As I look at your a proxy results in the second quarter and the guidance for a a higher third quarter in that business I mean, we're starting to talk about.
Thank you for an 800 million.
Million dollar EBITDA run rate I mean is that the sort of a neighborhood that we should start thinking about for the epoxy business.
Yeah, Hey, Thanks, a lot of Frank I mean this is Scott.
I will say is we're just not up to our target yeah, and so we have some work to do.
And that business right, we put a target out there of 30%, which maybe at the end of the day it gets exceed it but we still have some work to do so you know get you to a range.
Okay got you and then if I think about the ratchet principle of.
You know the that almost implies the.
The continued upward PCI.
We're getting close to the 200.
The level on the on the E C U P. C. I the that we've talked about in the past is necessary for a $2.5 billion dollar EBITDA.
EBITDA is the age is.
If something like that are nearer term than than perhaps.
Salt beforehand, what of your what are your current thoughts about getting to the kind of debt that midterm target.
Yeah, well I mean, that's you know frankly I mean, that's that's what we're working toward you know what what I will say is the issue PCI has moved up we're going to continue to work on moving it up you know most of the grow.
Haps, we sort of back has been from the derivative businesses, we have and if you think about the Lynch pin and products that I talked about some of the 2 that go into that E. C. U P. C. I R. Elemental coring and Epichlorohydrin, you know all of us.
Say right now that neither 1 of the.
Grow dollar in the merchant market anywhere close to reinvestment economics. So we have some room to move there, but we've also got some period of time to work our way out of certain of handcuffs that we have today is Tommy and said, we're making some progress on that.
Terrific. Thanks, so much Scott.
Sure.
The next question comes from Alexi, Yeah from off with Keybanc. Please go ahead.
Hey, This is Paul sorry, John for legacy is it possible debt you may look at extending the 10 year agreements of 30 per cent of you used earlier than 2025.
And then just the fall.
Could you discuss the size of the squad weapon opportunity. Thanks, so much.
Yeah Yeah.
Thanks, a lot Paul look I mean, I would just say for those 30 per cent of our ease of use that that ends in 2025 and any option is accretive for us and what I'll do I'll ask Bret to answer the.
Part of that sure. Thanks for the question of what's the.
Since we've taken over of Lake City, we've been highly involved in the next generation squad weapon program you know.
It's hard to define the health of the scale of of right now, but it's it's large.
It's more than just making the ammunition at lake.
City.
We have the support the army and building out a whole new infrastructure.
We're active in that today.
We do believe by about.
2024 does that will ramp up of extensively and really go throughout the whole contract period for us at.
Second city so.
It's the big program for the Army and we're highly.
All of them right now.
Thank you and the next question will be from Kevin Mccarthy of vertical research. Please go ahead.
Good morning, Scott I appreciate you're a lot more focused on value versus volume. Nevertheless, the volume side has been quite volatile lately no really across the industry and so if I think about the third quarter versus the second quarter what.
What kind of volume uplift might we see.
In Chlor alkali and vinyls and what kind of benefit would you anticipate you know relative to the superior fixed cost absorption. For example, and then maybe you could just kind of talk through you know.
Some of the force majeure of declarations.
Operating rate changes that are kind of running through your business right now.
Yeah. Thanks, a lot of Kevin Kevin I mean, you're right of course, we're focused on value over over volume you know I don't.
The bank in the third quarter that are you know volume as would be lower than they are in the cell.
Second quarter, but what I will add on to that is the fact that you know we're getting traction in our phase 3 of par Lane. So essentially you know applying our model to molecules that arent necessarily made on our assets, but flow through our business.
And run through our matrix, so there's likely to be some additional growth in that so what we're trying to do Kevin is really matching up we're going to drive for value yet we have of somatic to be able to still grow the company you know without having to build.
Build new assets, that's where we are.
Okay. Thank you for that and then secondly.
With regard to Winchester it looks like your sales were up.
The 110 per cent and the second quarter end of year over year basis.
Can you.
Help us with how much of that uplift would of been attributable to price versus volume and then on the pricing side are there additional.
Price benefits that you would anticipate in the third quarter sequentially versus the second quarter.
On the.
The win Winchester revenue being up I mean, it's a mix of.
Both right, it's price across our complete business, including the new business at Lake City, but it's also that volume day.
Comes from from Lake City, and being able to utilize.
Is that some of you know if you.
If you look at our pricing of chart in the back of the presentation, you'll see that we have announced another price increase in Winchester for in the third quarter on some products. So that'll be partially effective through the third quarter.
Yeah.
Kevin Thanks.
It's about half and half of the same.
Of the chain.
Thank you Todd.
Yeah.
And the next question is from Josh Silverstein with Wolfe Research. Please go ahead.
Thanks, Good morning, guys.
Looking at the EBITDA guidance for next year to be at least of.
The year over year can you talk about the different business units, what you're expecting there I imagine of Fox is probably moving higher with the margins but.
Anything that you can kind of break down by the the different business units would be helpful.
Yeah, Yeah, I mean, we didn't give a.
Well just I appreciate the question but.
We didn't give a breakout by business.
What's expected there, but the reality is I can indirectly answering your question.
<unk> debt.
Each business fundamentals get better and each.
The business, we have a specific set of actions that are likely to add value as well you've heard you know just to give examples of it you've heard the team speak to some of some of those right. We don't release ourself for more contractual restrictions and see a see a P.
Each day.
You know we work the upstream lynchpin product more and of parts C and were going after you know more recreational shooters in our Winchester business by growing the pie not taking share as well. So you know you.
They have a view that it's broad based.
Got it that's all of them for that and then just.
Just as far as free cash flow of deployment for for next year.
You guys are doing the $1 billion of of debt reduction. This year is there more balance sheet clean up for for next year or can you start to.
You might have about stepping up the return of capital profile using cash for for M&A. How are you guys thinking about them, but.
The $1 billion potentially for it for next year, Yeah. No no. We we have a number of options, where we're thinking about Paul do you want to give a little bit on that debt.
No problem I mean, if you think about it you know where we sit in 2000.
21 today, we're generating $1.3 billion of free Levered free cash flow, that's the cash flow yield of around 18% based on our current stock price.
Clearly, we're going to use about $1 billion of that debt to reduce debt and by reducing debt today that really.
The think of the balance sheet up to provide flexibility going forward to accomplishes the structuring activities, including M&A and parlaying activities. As we are the parlaying activities are obviously much more capital light.
Is there any necessary.
Free clean up for next year of can you really just redeploy all of that the $1 billion for you know for it for those other activities.
Yeah, I'll I'll I'll I'll jump in Todd and so this is this is Scott I mean, you know a part of it will go toward structuring activities of assuming we're successful.
He gets the whole at finding some targets the complement our model there will be exploring some other options as well there's not all of you know a lot more debt that we necessarily intend to take down, but we will be exploring other ways to get value for shareholders look I mean.
First from the other day, if this phenomenon of multiple compression keeps happening in our stock price or equity becomes the best return for US. It sits at a 19% return right now.
Got it yeah, that's what I was trying to get the alright. Thanks guys.
And.
And your next question is from Arun Viswanathan with RBC. Please go ahead.
Great. Thanks for taking my question.
The rest of the results. So yeah I guess the first question just real simply could you just reiterate or describe the the.
The natural gas on your business.
Yeah. There has been some inflation. There recently is there any hedging that we should be aware of or what's the impact there.
Yeah, Yeah, Hey, Arun. Thanks, Thanks, a lot I mean, yeah, we we do hedge I mean, Todd do you want to give a little more.
In the near term, we are very heavily hedged so as you've heard from us.
Before about a quarter out we are we were fairly heavily hedged. So we have a high degree of cost certainty in the sort of a rolling 4 quarter basis. So your comment about natural gas natural gas clearly has gone up lately, you really won't see unless that is sustained and you will see that in.
Our results over you know over the next year.
As our hedges start to roll off.
Back in the deck, we said the dollar change in <unk> and gas is worth.
<unk> million dollars of of of cost.
Great and then this.
As a follow up so I guess, what I'm hearing from you is you know the primary market is a little bit of a bottleneck.
You know.
The Winchester it that potentially could be a you know of value creation mechanism for you guys is that the right way to think about it and if you could maybe.
How would you characterize the bottleneck in Chlor alkali vinyls and oxy, what what are the the the kind of the linchpin there.
Yeah, Yeah sure I mean, the the the primer Mark.
Our primary business is certainly a linchpin for us and you know like like Bret said it at there.
You know limited suppliers of that and we haven't fully exercised that yet, but as our business grows certainly we're going to use that to support our business and the other you know in the chemicals business Epichlorohydrin is the key upstream.
Green material for liquid epoxy resin.
There there there's only 1 producer of that and all of the Americas and we're also of the leading producer in Europe as well so by driving value of that key upstream intermediate.
You know, we can drive value across our whole downstream portfolio in part C. And so you get a large value for the same sort of thing applies you know to elemental coring, if theres 1 key to this company that list more value than anything else is that continuing.
<unk> value lift of elemental corrine and using that elemental Corey you know according to the best return to the E. C. You across our broad downstream derivative portfolio not just in our C. A P to P V. This business, but also in our apart.
Business as well.
Great. Thanks, and if I can sneak 1 more quick 1.
Have you had any impact from the container shortages globally is that something that the pressure point now or do you see that not as the issue for you.
Yes, sure I mean for us from a supply chain.
There's been some impact that we've been able to deal with it the the neatest impact as the future impact in the past business of a policy, where new ships are being built many new containers to be utilized on the ships all of those things are coated inside and out with the policy. So it's actually of forward positive.
The impact.
And the next.
Question will be from Eric Petrie with Citi. Please go ahead.
Hey, good morning, Scott.
Eric.
I wanted to ask about your non core.
Marine supply in the Tio.
2 industry, what are the pros and cons and are these producers that are you know its carrying other supply or just not resist or just resistant the paying higher price for chlorine.
Although I would say that that you know that whole industry, you know get corrine.
<unk> from Olin debt is far undervalued and we have commercial arrangements to day that keep that foreign far undervalued relative to any other opportunity that we have for that chlorine including in many.
The cases, just not selling it at all so there's a value uplift opportunity there and I guess, what we're saying is we're just not going to be in the business of that supply in a big way in 2000, Twenty's free because we're going to you know if if we have to continue supplying.
According to the terms that we have today. It essentially means that you know we're going to match that supply up to a future decision around the capability to the supply. So that's what we're doing.
Helpful. And then the follow up I think you know.
The already in 2018, 2019 third quarter and the fourth quarter resulted in the EBITDA was lower by $100 million. What are you seeing this year and you know based on your order books and an inventory of supply.
Well you know what like US like we say third third quarter is expected to be better.
In the second quarter, you know you might compute from our guidance of at least 2.1 billions of dollars in the full year, but you know it is possible that we faced a few challenges there in the fourth quarter and that had to do with some seasonality, but you know I'll say the supply chains are empty. So.
Better than all of we still got a lot of work to do there to see the final story.
Thank you.
The next question is from Angel Castillo with Morgan Stanley. Please go ahead.
Thank you for taking my question and congrats in the quarter or am I just wanted to I guess.
So we've got a little bit more on the net productivity of your slide showed a 100 million for.
For 2021 and I believe the range with the previous P..52 of hungry. So you continue to.
Do the rollout here and a lot of initiatives underway. So curious 1 could you expand on the comments of the additional the underutilized capacity under review.
The expense actually we think about net productivity for the remainder of the year and going into 'twenty 'twenty 2.
Sure I'll I'll turn that question to Jim Yeah. Thanks for the question.
You're absolutely right. We are we have been successful with our program. We've got a very broad based program. We've got over 12 hundreds of different active projects.
And then just every geography every division every function. So we've got the whole company involved in productivity. So that's the positive we did remove the bottom end of the range as we made progress against the program. So we have $100 million target out there right now and as far as capacity you can see on the slide that.
The kind of projects.
And a lot of it the productivity projects that are related to capacity and looking at scrutinizing scrutinizing capacity for high investment high cost underutilized.
And we're not going away from that so even though we've made some progress up to this point, we're going to continue to evaluate all of our assets.
That's for the value of their delivering the investment that they require and we'll make decisions as we go for it.
No. That's very helpful. Thank you and then just you know I wanted to follow up a little bit more on the I guess that last question around the.
The fourth quarter it sounds like it's it is the right way to read that that they're just the conservative.
A lot of them kind of embedded in that fourth quarter of <unk>.
Just given the visibility into that into the market heading into I guess the next couple of next few months or is there anything else I guess the to consider there is as we look at the Oh the.
Overall guidance, because I guess the way I'm looking at the guidance implies.
The continued step up of you know EBITDA from the 559 this quarter.
Looking at it from that perspective, it would seem to suggest that 8 points. When he wanted to be $2.2 billion of higher if you're going to continue the steady improvement, which puts twin going to even higher so just.
It gets a little bit more color would be helpful.
For Arone hundred concept for the kind of contextualize that.
Yeah. Thanks, I mean look all of our guidance of at least 2.1 billion for the for the year I don't know I wouldn't say, it's you know of conservatism when when you think about the the fourth quarter, but we are heading into our fourth quarter.
Were you know market dynamics and market fundamentals are no different than maybe many years and are in the past and in fact, they're likely better than many years in the past sort of that sort of normal seasonality of downturn that you get we're working hard to.
To mitigate that you know the only reason you may send some conservatism as you know we just don't want there to be of stake if we run into a little golly on the way up the mountain to adjust our model in a time of a little bit of seasonality, but you know the external world sees that as is heading.
You know down of trough, which absolutely is the case as we said about 2022.
That's very helpful. Thank you.
Sure.
And the next question comes from Matthew Blair with Tudor Pickering and Holt. Please go ahead.
Hey, good morning.
<unk> for taking my question, Scott ease of cockpit soda prices have been improving in July that the currently about 60 of ton above the Q2 average do you of any more color here and does this provide support for U S caustic price increases.
Yeah sure. Thanks for the question.
In June.
The goal of course, we don't overly focus on 1 product, we're always focused on improving the whole E. C. You, but let me see if Tom you can give us a little bit of color about what what's going on there the other thing that the.
On the caustic soda in the second quarter, we did see demand starting to.
Generally.
In fact of the general economy picked up particularly in North America, and we did see some activity pick up in in Europe.
As well, but generally speaking you know.
While the supply demand fundamentals of caustic soda did improve and.
We have seen prices starting to reflect that.
Clearly the supply demand situation in caustic is still relatively weaker than the supply demand configuration, we see in flooring.
Albeit sequentially caustic on the metals on their own are showing improvement.
Improvement and even through the third quarter as seen by some recent price increase announcements.
Caustic soda of it still remains the weaker side of the <unk> and we continue to run our model.
Against that weaker side.
Got it and then on slide 6 for you you mentioned that you're completing.
The 10 year contract term for.
For 30 per cent of your east to use so that's 30% applies to the tiered volume right can you give us the.
The general idea of of what kind of the EBITDA, you're getting off of that 30% you know what would it be like less than 15% of of your your EBITDA.
Yeah.
I would just answer.
For that by saying, that's essentially cash value destructive.
Good day.
Okay, So maybe even though our okay great. Thank you.
Okay.
The next question is from Mike Lee the head with Barclays.
Please go ahead.
Great. Thanks, Good morning, guys.
First question I think on your longer term outlook in 2025, you mentioned some options, including redirecting the contracted used to use to significantly lowering your carbon footprint. So I was hoping you could flesh out a bit more of what you meant by that comment.
Yeah.
I guess.
Guess, what I've said is that that's a lot of volume you just heard me say its cash value the disc.
Struck down it ends in 2025, you know, we're not producing that volume certainly our carbon footprint goes down and.
It also turns out the in it.
Credo to us from a financial standpoint, as well so it's like a win win.
Got it okay that makes sense and then second question I think diluted share counts up about 4% year to date, where should we expect that number to finish the year and relatedly, you've highlighted M&A opportunities, but you've also.
Clear in your slides you think your shares of more than 50 per cent undervalued. So once debt Paydown is complete how should we think about accelerating buybacks versus M&A.
Well the total make a comment on that first part of the question maybe I'll comment on the second part, yes, yes, our outstanding shares have increased this year.
Made pretty clear 2 million shares as you can see through the cash flow statement. We've had some option exercises this year and that generated about $50 million of cash flow for all of this year. When you look at our absolute absolute level of share count we are still well below where the share count.
Your line.
Post the shares that were issued back in 2015 for the Dow acquisition.
And all of the second point I mean, clearly any any acquisition. We do you know it's going to be more than of course going out of it by EBITDA, there's gotta be quite of lot of synergy.
Count when you, but the direct synergies would be just the smaller part of that the larger synergies would come from the fact that we you know expand interlinked matrix, where we're able to execute multiple activations on any given day and get a response somewhere else.
Val in the matrix that may be no 1 expected that he's able to lift owens value. So we'd have to be able to get significant uplift what that don't compete with right. Now of course is you know our levered free cash flow return per share, which again is 18 or 20 per.
The <unk> whatever whatever it is today. So that's a hurdle for you know right now.
Put the money in growth acquisitions.
Got it thanks guys.
Sure.
And the next question is from Steve Byrne with Bank of America. Please go ahead.
Thank you Scott.
Scott you mentioned pricing on both sides of the east you have improved.
My question for you is how his mix yes.
The driven that.
You have the numerous buckets that you're you moves the coring items into.
And how.
What have you how has that changed to drive up that value and more importantly, how.
How much more could it change you mentioned you know the merchant sales on Tio too. It's just just 1 piece, but are you able to move so significantly more.
The Hungriest buckets, then you have so far.
Yeah. Thanks, a lot for the question I mean, the answer to the.
Both of those are sort of the same you know how much is of contributed how much kind of contributor in the future of and the answer is a lot.
So both of you know this is our of our model, we're moving things around.
Every day and letting the weaker side of the E. C. You guide or market participant participation in looking at our fleet derivative change about which 1 is delivering the most value on any given day, we only expect to be able to expand our capability to do that in the.
And for sure not only through our activities today, but through our parlin activities and through our structuring activities as well.
And then maybe a similar question on the on the of Pax He business kind of.
You shifted volumes either more downstream.
Few or more upstream and and how does that.
Just get reflected in your your PCI algorithm I mean, you're moving you know some portion of your of the chlorine side of the each of you into the business.
The business is generating.
The profit is that reflected in your of PCI.
So I mean, Pat do you want to give a little color I've seen I think first of all of it got a lot of flexibility and the prioritization of the value of our buy and Lindsay in the within the a part of the value chain right. So and we have a lot of flexibility.
Obviously, we got a lot of flexibility on our pricing as demonstrated here you know over the last you know 3.
3 months 6 months or a year so.
We have a lot of flexibility to do that and I think on mix.
We look across that whole portfolio of of pack season, you know from upstream.
The more.
And even converting that.
You know it all in the V. P. A we've got options there that were discovering.
And then we have a lot of optionality of.
Where we place that at the molecule and we monetize it in the form.
The liquid epoxy resin converted resins.
And the ties that L. A R into things like laminates when energy so.
A lot of flexibility and then the the last part of that mix flexibility is is around you know merchant versus captive.
So that's kind of the way we think of it it's a pretty dynamic creative of where we can extract the best value across that whole chain.
Yeah.
And do your decisions get reflected in the P C zone.
Yes.
Yeah.
Thank you.
The next question is from Travis Edwards with Goldman Sachs. Please go ahead.
Hey, good morning, and thanks for the time I wanted to follow up on Josh <unk> question earlier around capital allocation accurate 1.5 times leverage this year in EBITDA in the same ballpark next year or better for sure.
Similarly, the leverage improves.
Further, but I'm curious when you talk about freeing up the balance sheet to engage in M&A opportunities or just share how the remuneration.
Is there a sort of range of leverage do you plan to manage to as you consider these opportunities specifically when the commodity conditions may not be the favorable.
Todd do you want to comment.
Yes, Travis we think about the absolute.
So level of debt and you heard the comments earlier with the actions we're doing in 2021.
It really gets us in the range of where we're looking for maybe a little bit more next year, but were down for the absolute level of debt not necessarily of leverage targets.
Got it that's helpful. And then a separate question, but I guess somewhat related is.
Yeah look of a potential path to the investment grade rating of some occasionally brought up in our conversations around the olin, but regardless of your desire or the probability of that happening I'm curious are there even specific quantifiable benefits to business fundamentals again.
But from the.
The general more favorable issuance costs, but are there specific benefits to actual business fundamentals renegotiated renegotiating terms et cetera, if you have an IGD ratio.
We generally and we've said this before as we target to operate our business with investment grade metrics.
And I think we're well on that pathway as we continue to.
Repay debt this year and so it's.
It's our view of that the business fundamentals within Olin and how we want to operate operating with investment grade metrics is critical for us as we move forward.
Got it thanks for the time.
Yeah.
And the next question is from Roger Spitz with Bank of America. Please go ahead.
Thank you back to the first is can.
Can you articulate your latest view on your desire to achieve IQ ratings from the agencies rather than just operating.
Hygiene metrics.
Scott do you want to continue on that.
Roger This is Todd.
Want to operate with investment grade metrics.
We have we've never stated that that was a publicly that that is a goal of the company to become investment grade.
With the operate with investment grade metrics, and we think that what we're doing with the balance sheet to delever. It gives us the flexibility as we move forward.
Thank you.
The second 1 is you are currently changing the chlorine caustic eliott of pricing paradigm.
In a in a very significant way.
We want.
But.
What is changed either.
So I mean, clearly a true willing dry but is there is there any other.
Change in the industry.
Dynamic.
That is allowing you to turn this paradigm.
On its.
And then the extraordinarily positive way thank you.
Well I mean, I wouldn't I wouldn't say, it's industry dynamic I would just say that you know olin is controlling its own destiny and changing its oh.
Its own outcome in other words, you know what.
We're the leader in elemental Corrine.
We have a contrarian model that we are focused on every day to go get the value. We have a list of clear actions and we've identified elemental chlorine as the number 1 driver of this company's overall value of evolution and it is a ratchet and of when Japan.
Because of that and that's how we treated and when you focus on it that much youre going to liberate a lot of value.
Got it. Thank you very much true time for.
Ladies and gentlemen, as there are no further questions. This concludes our question and answer session.
I would like to turn the conference back over to Scott Sutton for closing comments, yeah. Okay. Yeah. Thanks, a lot I mean, you know I.
Guess, what I would say in closing as the Olin is really focused on 2 main activities right now in the the first 1 is lifting up all of our OLED teammates who are doing just a great.
And the second 1 is that we're continuing to print wins and demonstrate success. So that we can in turn demonstrate that we deserve a higher valuation.
So with that thanks, a lot for joining us today.
And thank you Sir and thank you for.
Attending today's presentation you may now disconnect your lines alright. Thank you.
Yeah.
Okay.
Yeah.
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